* Market excited by new capital funding avenue
* Other UK lenders seek Nationwide's advice
* CCDS follow-up marks largest sterling capital trade since
By Aimee Donnellan
LONDON, March 7 (IFR) - UK banks are plotting capital trades
in their home currency market after Nationwide this week sold
the largest such deal since the collapse of Lehman, unearthing a
surprisingly deep pool of investor demand.
Sterling has until now been overlooked by European banks
looking to raise Additional Tier 1 bonds. Wary of trying and
failing with something new, the continent's banks have relied
instead on the US dollar and euro markets to ensure the success
of their riskiest bond offerings.
This aversion to sterling, however, is a relatively new
phenomenon. Pre-crisis in 2006, financials raised over £24bn of
hybrid capital - a colossal figure considering just one issue
sold in the market in January and February this year worth
But that all looks set to change after Nationwide's triumph
on Tuesday. The UK mutual not only raised a chunky £1bn, but
sold the 6.875% contingent capital bond some 10-15bp inside
where euro and dollar offerings would have come, attracting a
£11bn book in the process from over 500 investors.
"This is an incredible result for Nationwide but also it
shows the depth of demand the sterling market can offer, which
up until now had been seen as a niche currency for AT1
issuance," said Gordon Taylor, head of financial institutions
DCM at RBS.
As the UK's third largest mortgage lender, Nationwide was in
a unique position to test the market. Loved for its
straightforward business model, the country's largest building
society faced little opposition from investors.
"To get a 6% handle on a bond that has such a unique
structure is a big endorsement of how comfortable accounts have
become with the product, which is great news for all the banks
that have to raise capital this year," said Barry Donlon, head
of capital solutions at UBS.
Total issuance of Additional Tier 1 capital is likely to
reach EUR31bn in 2014, JP Morgan analysts estimate based on a
peer group of 25 European banks.
ENOUGH FOR NOW
For Nationwide, the results surpassed all expectations in
terms of size, price and level of demand.
"I didn't even know there were 500 sterling investors that
could buy the trade," said Andy Townsend, treasurer at
The deal is perpetual with a first call date in June 2019,
and will be triggered if the issuer's fully-phased Common Equity
Tier 1 ratio falls below 7%. A breach of that threshold will see
the securities convert into Core Capital Deferred Shares (CCDS).
Last November, Nationwide sold £500m of CCDS to meet demands
from the Prudential Regulatory Authority to beef up its leverage
ratio ahead of the 2019 Basel deadline, and Townsend says the
latest trade takes it further towards that target.
"CCDS was the first big test for Nationwide and its success
was a great endorsement of our business model, but the result of
the Additional Tier 1 bond has a much broader significance to
other UK banks that have been calling to discuss similar
transactions," said Townsend.
Having issued £250m more than initially intended, Nationwide
is unlikely to return to the market this year - unless the
regulator comes knocking again.
In the wake of the deal, sources say two UK banks are now
eyeing the prospect of raising sterling capital to satisfy
strict regulatory requirements and enhance their leverage
The improving market backdrop will certainly support further
issuance, with investors continuing their quest for yield and
buying riskier and riskier structures.
"This is a watershed moment for the AT1 product," said AJ
Davidson, head of hybrid capital and balance sheet solutions for
EMEA and Asia-Pacific at RBS.
"We now have AT1 in every major European currency and would
expect not only other UK banks but major European banks to
access the sterling market."