* Sterling bank bond issuance back to pre-crisis peak
* Lenders unearth nearly £20bn of demand for capital trades
* Investors question senior/subordinated pricing divide
By Aimee Donnellan
LONDON, April 11 (IFR) - Continental European banks'
increasing use of the sterling market for raising hybrid capital
could have ramifications for domestic UK lenders who are
struggling to convince investors there is value in their senior
Banks have raised over £9bn across Tier 2 and Additional
Tier 1 subordinated bonds since January - the strongest start
since 2006 and up £8.6bn from the same period last year,
according to Thomson Reuters data.
And the demand for this paper has been insatiable.
Nationwide Building Society, Credit Agricole and BPCE have
unearthed nearly £20bn of demand, dwarfing the mere £2.5bn
equivalent that three recent UK senior deals have received in
the past few weeks.
"Investors are seeing more value in capital than in senior,
unsecured bonds these days," said Keval Shah, head of investment
grade syndicate at Lloyds Bank.
"Though the question whether Tier 2 is too wide, or senior
too tight, in a bail-in world remains unanswered."
Investors say the they may begin demanding higher spreads
for senior unsecured offerings and accept lower levels for Tier
"Lower Tier 2 bonds have a lot of value in comparison to
senior debt where bail-in clearly hasn't been priced in yet,"
said Dierk Brandenburg, a senior bank credit analyst at
"Once bail-in is applied we will start to see investors
looking for higher spreads for this kind of debt."
The frantic chase for yield in the euro market has been
driving investors into the riskiest banks' unsecured bonds even
though, potentially, bail-in could leave them with nothing.
But the UK's smaller investor base can be far more selective
and demanding with issuers that are trying to market debt.
"Investors are asking themselves why should they buy a
bank's senior unsecured debt, when they are comfortable with the
credit and happy to invest further down the capital structure,"
Borrowers are aware that the return of sterling bank capital
market is offering them a one in a 10 year opportunity, said a
hybrid capital expert.
Non-domestic issuers tend to prefer the depth of the US and
euro markets, and only risk the sterling sector when demand is
"The sterling market offers banks duration at competitive
levels," said David Hague, head of UK & Ireland FIG DCM at
The low rate environment is also helping issuers. As is the
case in the euro market, investors are being driven into riskier
structures in search of the highest yield that will allow them
to benefit from the tightening market.
"UK investors are now happy to consider investing in bank
capital having seen issuers return to a greater level of
financial stability over the last few years," said Hague.
Bank capital requirements have changed dramatically since
the crisis, including tough new rules that force banks to
proactively raise subordinated debt.
Additional Tier 1 and Tier 2 capital are used to boost
banks' defences against collapse, ranking lower than senior debt
in the capital structure, meaning that unsecured bondholders are
protected by the capital buffer, in theory.
But investors are now questioning this logic. Nationwide
provided the clearest example of this problem last month when it
tried to sell a rare senior unsecured bond - a 750m five-year
bond with a coupon of 1.625% that found lukewarm demand from
At the time, bankers were at a loss to explain the lack of
interest from UK investors that only took 13% of the bonds.
Some explained that UK investors were already sated by the
recent sale of Core Capital Deferred Shares by Nationwide which
offered a 10.25% distributon, and the 6.875% coupon on the
lender's Additional Tier 1 deal.
The expected uptick in sterling bank capital issuance is
likely to further expose the lack of relative value in senior
"A number of issuers are monitoring the sterling opportunity
which affords some attractive tenor extension versus euro
alternatives, as well as investor diversification and low all-in
yields," said David Carmalt, managing director of FIG DCM at
"With the expansion of the UK-based investor community,
banks have an ever-wider audience to sell debt product into,
which obviously provides price tension."
(Reporting by Aimee Donnellan; Editing by Alex Chambers and