* Italian lender struggles to match European peers with country’s debut AT1
* Investors focus on poor performance of recent transactions
* Hybrid bank capital experts defend normalising market (Rewrites throughout, adds context, background, investor and banker comments)
By Aimee Donnellan
LONDON, March 27 (IFR) - UniCredit’s debut Additional Tier 1 bond has failed to attract the level of demand of recent similar transactions, and with these deals performing badly, there are questions about how much more supply the AT1 market can handle.
Although Italy’s biggest bank by assets chose dollars after euro deals from Santander and KBC underperformed, the US$8bn orderbook is the lowest level of demand for a security of this kind in 2014.
In normal circumstances a deal covered multiple times would be deemed a success and ensure secondary market performance. But after massive books for Santander and KBC failed to do the trick, the worry is that further market weakness could thwart other banks waiting in the wings with AT1 trades.
“The CoCo market could do with a break, and with some issuers coming to the market for the third time in eight months it doesn’t send a good signal,” said Robert Montague, a senior investment analyst at ECM Asset Management.
“It was always likely that the market would suffer some indigestion even though we’ve seen these huge order books.”
Credit Agricole began its roadshow of its second Additional Tier 1 bond today, while Societe Generale is now preparing its third hybrid offering that was delayed due to a ratings action by Fitch.
Banks across Europe, like UniCredit, are rushing to boost their balance sheets to meet tough new regulatory requirements via Additional Tier 1 issuance.
However, investors appear to be more discerning about the coupons they are willing to accept and are looking for a buffer to compensate for potential softening in the secondary market.
“The lack of performance of recent deals is definitely on the minds of investors, and while the primary market may not need to take a break we are not seeing the 11, 15 and 20 billion order books we were seeing only two weeks ago,” said a hybrid capital expert.
KBC, Banco Santander and Danske Bank have all sold these deeply subordinated perpetual deals in euros recently, but despite massive order books that involved as many as 700 investors, those bonds have sold off by as much as 2.5 points in secondary trade.
UniCredit opted to sell a dollar perpetual note with a 10-year call option that should offer investors additional yield and could shield the deal from the weakness in the euro market.
It doesn’t have the full 144A/Reg S registration and so was limited to selling its bond to Asian, European and a handful of US offshore investors, so was unlikely to achieve a US$17bn order book like Credit Agricole managed in January.
Nevertheless, the Italian bank is poised to price a US$1.25bn bond with an 8% coupon, lower than the low 8% range where it began marketing.
“The market needs to normalise and people need to realise that an US$8bn order book from 500 investors is not a bad result,” said a banker.
“I don’t think it will propel Intesa into the market but we may see a second tier Italian bank follow this up now that the market has been tested by one of the country’s national champions.”
Banks are putting a lot of care into preparing these transactions. This week Societe Generale delayed its bond until it received clarity on a ratings action from Fitch.
UniCredit similarly played it safe and pushed back this high profile capital transaction by two weeks, according to sources, allowing investors to digest news of a 14bn loss due to huge writedowns on bad loans and past acquisitions. (Reporting by Aimee Donnellan, Editing by Alex Chambers, Helene Durand and Marc Carnegie)