May 18, 2020 / 1:42 PM / in 15 days

MIDEAST DEBT-First Abu Dhabi Bank faces pressure to redeem AT1 bonds - sources

DUBAI, May 18 (Reuters) - First Abu Dhabi Bank (FAB), the UAE’s largest lender, is likely to come under pressure to redeem $750 million in perpetual bonds in June, even though not calling them would be cheaper for the lender, five banking sources said.

Additional Tier 1 (AT1) bonds, the riskiest debt instruments banks can issue, are designed to be perpetual in nature, but lenders can call them after a specified period.

Banks have almost always exercised these “calls” at the first opportunity, but Deutsche Bank, Germany’s largest lender, decided not to in March as market conditions worsened.

In a first for the region, smaller Gulf lenders Bank Dhofar in Oman and Bahrain’s Ahli United Bank have also not exercised recent call options amid concerns about tighter liquidity due to lower oil prices and the coronavirus pandemic, the sources said.

Now it is FAB’s turn to decide. If it redeems the bonds, it would still have sufficient Tier 1 capital, one of the sources said, although some said it may still look to issue new bonds despite having to pay a higher interest rate.

If it does not call the notes, investors would “sort of feel betrayed,” another of the sources said, as many view such bonds as essentially maturing at the first call date.

FAB did not immediately respond to a Reuters request for comment.

The coupon on FAB’s bonds issued in 2015 will fall to around 3.75% from 5.25% currently should the bank not redeem them next month, while higher borrowing costs for the region than before the current crisis suggest the lender would have to pay up to issue new AT1 debt.

“It’s a dilemma,” the first source said.

REPUTATION

“I think the ego and the reputational ramifications are probably weighing more,” a third source said, adding: “If they don’t call it, it might give a negative signal to the market.”

The second source said FAB may decide to just issue a small amount of new debt, “just because they’ll say, ‘hey we are FAB. We can call this and ...go out and do a new issuance”.

Several of the sources said it was likely that FAB would come under political pressure to call the bonds so that it could re-establish a pricing curve for smaller lenders, who have mostly struggled to tap the international debt markets so far.

Deutsche Bank must now wait five years before it can call its own AT1 bonds again having passed up the opportunity in April, leaving investors “stuck”, said another of the sources, but FAB would have another chance in December, “so I really don’t think it’s going to be that bad if they don’t call,” he said.

The last source said FAB’s access to the market could suffer if it decided not to call the bonds.

“If you’re expecting the main bank of the GCC, or the UAE at least, to do something like that - that’s huge,” he said. “It’s more about posturing, about how it looks.”

Reporting by Yousef Saba; Editing by Kirsten Donovan

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