LONDON, Feb 12 (IFR) - Spain's second largest bank, BBVA,
bolstered its balance sheet this week with EUR1.5bn in
Additional Tier 1 bonds, as the country continues to steal a
march on much of the rest of Europe in raising this risky form
Spain is one of the rare countries in Europe where there is
enough clarity for banks to issue Additional Tier 1 bonds. BBVA
and Banco Popular Espanol have made the most of this, raising
capital to fortify their balance sheets and improve their
BBVA's new EUR1.5bn 7% perpetual non-call five-year issue
was the Spanish lender's second Additional Tier 1 deal, but its
first such outing in euros.
Investors quickly threw their weight behind the transaction,
which converts to equity if BBVA breaches a pre-defined trigger.
More than 600 investors rushed the Spanish lender with EUR14bn
of orders, with the low interest rate environment continuing the
drive into the riskiest assets.
"This is only the third euro-denominated Additional Tier 1
bond so far and the impressive result demonstrates the level of
risk appetite in the market," said Tim Michael, head of FIG
syndicate at Citigroup.
Only Credit Agricole and Barclays have raised Additional
Tier 1 capital in both euros and US dollars, despite the fact
that analysts estimate Europe's lenders will be looking to raise
between EUR20bn and EUR45bn in Additional Tier 1 and Tier 2 debt
Since October, the cost of insuring subordinated debt
against default has dropped by 86bp, to 136bp, according to
Markit's Subordinated Financials index on Tradeweb.
With increased confidence that the worst of Europe's woes
are over, some investors have been actively encouraging further
issuance, which would provide some much-needed diversity.
"We would like to see banks raising more of this kind of
capital so they can improve their leverage ratios," said Dierk
Brandenburg, a senior bank credit analyst at Fidelity.
"We are expecting more names to come to the market, as
Deutsche Bank has explicitly said it will look to raise this
kind of capital."
Banks from Italy and the Netherlands could be allowed to
sell contingent capital (CoCo) bonds this year, as their
politicians seek to level the playing field with other European
BBVA was the first European bank to sell an Additional Tier
1 bond last April. That USD1.5bn perpetual non-call five-year
deal priced with a 9% coupon and complied with the Capital
Requirements Directive (CRD IV).
Back then, European accounts were the driving force behind
the trade despite its being in dollars, taking nearly
three-quarters of the bond. This time around, European accounts
took an even bigger chunk of the deal, with 81% of the bonds
sold to them.
BBVA took advantage of the recent deals' performance and a
significant tightening in its outstanding bond, which was bid at
yield of 7% pre announcement, two percentage points less than
where it priced. Investors are hoping other banks will follow
the same course.
"A euro deal from BBVA is yet another step in broadening the
market, and by simplifying the trigger it made it a more
attractive prospect for investors," said Brandenburg.
Unlike the dollar issue, which had to include as many as six
triggers to satisfy various regulatory requirements, the new
deal has a much more straightforward structure
This time, bonds convert to equity if the bank breaches a
5.125% Common Equity Tier 1 ratio, either at the bank or group
level. That made the deal a much easier sell, bankers said.
However, investors still face the risk that coupons could be
deferred at regulators' complete discretion.
(Reporting by Aimee Donnellan; Editing by Helene Durand, Alex
Chambers and Philip Wright)