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* Bankers hail SG Tier 1 as key litmus test
* French SIFI opts for simple structure, low trigger
* Investor take-up considered key marker of success
By Aimee Donnellan
LONDON, Aug 23 (IFR) - Societe Generale is meeting investors in Asia and Europe next week to market the first EBA-compliant temporary write-down Tier 1 bond, that could persuade for other European banks to pull the trigger on similar hybrid capital deals.
Bankers say that Deutsche Bank, Barclays and Danske Bank as well as five other European banks are currently waiting to sell Tier 1 capital and this could provide the benchmark they are looking for.
Discussions with investors will focus on the US dollar-denominated Additional Tier 1 Reg S deal's structure (including coupon deferrals and triggers) and, most importantly, pricing.
"We are opening the ball for other issuers to use this type of structure," said Antoine Loudenot, head of capital structuring at SG's corporate and investment banking unit.
"There are a lot of clients that are looking to buy into this structure and the market is certainly conducive to its success."
Daniel Bell, head of EMEA DCM capital products at Bank of America Merrill Lynch, said: "The test for the market will be how it values the write up, given it must now be at the discretion of the bank, rather than automatic upon a return to profitability, like some of the old hybrids."
SG is keeping it simple - unlike BBVA which in April sold an equity convertible USD1.5bn 9% Additional Tier 1 bond with six separate triggers. SG's instrument has only one.
This will trigger if the bank's Common Equity Tier 1 (post CRD IV) ratio falls below 5.125%. At that point the security is temporarily written down, thus creating instant capital for the bank. SG's fully-loaded CET1 ratio under the latest Basel 3 rules was 9.4% as of June of this year.
"Investors had been very receptive to the idea of a temporary write down structure as many cannot participate in equity convertible structures due to mandate restrictions," said Vincent Robillard, head of group funding at SG.
"In the future we may seek diversification and opt for an alternative structure."
Bankers say that a number of investors will draw comfort from the fact that they will not be permanently written down, and many will be attracted to the 8% coupon where many believe the bond will price.
"We're pretty neutral on all these different structures," said Dierk Brandenburg, a senior bank credit analyst at Fidelity.
"The trigger is fairly remote on this instrument so the focus is more on the coupon deferrals. We need to know if we are subordinate to equity particularly at banks that are challenged on capital under Basel 3."
Another key test of the instrument will be its geographic distribution. Up until now, instruments with new or seemingly aggressive structures (such as Barclays' first permanent write down CoCo) had to first rely on the support of Asian private banks to get the process going.
Bankers say it's important that SG doesn't rely solely on the Asian private bank bid for this trade because the broader market needs to see that there's strong institutional support for temporary write-down AT1 structures.
SG was certainly hopeful that the deal will have a wide appeal. "We have already received a lot of interest from institutional investors in Asia and Europe and hope to find interest from a broad range of accounts," said Robillard.
But despite that positive sentiment from the issuer, some are questioning the premise of temporary write-down structures all together.
They say that if a bank's capital falls below 5.125% the regulator would already have the keys to the bank and recovery would be extremely unlikely. Therefore investors will need to put their trust in the more than 400bp buffer protecting them from a trigger that could turn out to lead to a permanent write-down.
But for the most part, bankers are hopeful that SG can provide a bellwether of market support for a new instrument.
"Societe Generale will provide the perfect test case for this structure," said AJ Davidson, head of hybrid capital and balance sheet solutions for EMEA and Asia-Pacific at RBS.
"They're from a core country, have a strong reputation in their domestic market and a lot of other European banks have similar credit profiles to them."