* Swiss bank builds record CoCo order book
* Cash rich investors rush for 4.75% coupon
* BBVA lines up euro AT1 as market improves
By Aimee Donnellan
LONDON, Feb 7 (IFR) - Swiss bank UBS cracked open the European contingent capital market for 2014 this week, attracting the largest order book it has ever seen for a low trigger Tier 2 issue in the latest sign that the European investor base is fully embracing the product.
The EUR2bn 12-year non-call seven-year issue drew EUR10.5bn of orders from over 550 accounts, showing how far the market has progressed and how accustomed investors have become to these risky trades since UBS priced its inaugural total loss issue back in 2012.
The pricing at 340bp over mid-swaps was the lowest ever spread for any hybrid instrument from the bank in a major currency, and the deal had more than double the orders of a similar bond it priced last May in the dollar market. The 4.75% coupon, meanwhile, was also a far cry from the 7.25% it had to pay on its first CoCo outing.
“We’re seeing more and more European investors gaining approval to buy these kinds of instruments,” said Barry Donlon, head of capital solutions at UBS.
“The order book for a Tier 2 CoCo is still very different from that of an Additional Tier 1, but I expect we will see more of these traditional investors move to the Tier 1 product in the coming months. This is good news for a long list of banks that are looking to issue capital this year.”
UBS, like most other banks, has favoured the dollar market to sell its low-trigger contingent capital issues. This transaction was its first in the single currency.
However, with issuance of new-style bank subordinated debt expected to increase materially this year, borrowers have to seek out new investors in order to sell their bonds.
European banks could raise as much as EUR20bn and EUR45bn in Additional Tier 1 and Tier 2 respectively in 2014, according to Citigroup estimates.
“We’ve always thought that Europe would produce a strong market of buyers for these kinds of instruments,” said Simon McGeary, head of the European new products group at Citigroup.
“A lot of issuers were going to the US because of the depth of the market, but in Europe we are starting to see real money accounts taking part, which we think will increase in the coming months.”
This should come as good news for Spanish lender BBVA, which is planning to sell its second Additional Tier 1 as early as next week - a euro deal this time rather than a dollar bond.
While the risk profile of UBS’s issue is very different from the instrument BBVA is planning to bring to market, the demand shows that appetite is there for new-style bank subordinated debt.
“Additional Tier 1 bonds attract a different type of investor but as that market becomes more homogeneous I think we will see more mainstream investors looking to buy these instruments, particularly in this rate environment,” said Dierk Brandenburg, a senior bank credit analyst at Fidelity.
Cash rich investors, struggling to find yield in a low rate environment, needed little convincing to buy the total write-off bond, despite the prospect of losing everything if UBS’s Common Equity Tier 1 ratio falls below 5%. That ratio stood at 12.8% in the fourth quarter of 2013.
“UBS ticked all the boxes,” said Brandenburg.
“It’s investment grade, low trigger, and came in euro format. The investor base is clearly growing in Europe which is evidenced by the size of the order books.”
Credit Suisse and Barclays are the only other two banks to have tapped the euro market with these new style instruments. The former sold a EUR1.25bn low-trigger Tier 2 deal in September, having attracted EUR3.15bn of demand, while the latter priced a EUR1bn AT1 in early December on a book of EUR12bn. (Reporting by Aimee Donnellan, Editing by Helene Durand, Julian Baker)