July 4, 2014 / 12:36 PM / 4 years ago

BPE prepares for stress tests with high trigger CoCo sale

* Spanish lender to sell second Additional Tier 1 bond

* High trigger to benefit bank in upcoming stress test

* Investors face lower buffer to possible conversion

By Aimee Donnellan

LONDON, July 4 (IFR) - Banco Popular Espanol is preparing to sell its first high trigger CoCo, helping the lender to strengthen its capital base ahead of European stress tests.

The Spanish bank has hired Credit Agricole, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS to sell the euro-denominated perpetual non-call five-year bond, which will convert to equity if the bank’s capital falls below 7%.

Following investor meetings on Monday, the bond is expected to price on Tuesday at the earliest, and to be 500m-750m in size.

There has been a major recapitalisation of Europe’s banks ahead of the ECB stress tests. That has seen lenders raise 35.5bn in equity, according to Morgan Stanley, to ensure their balance sheets are robust enough to withstand another crisis.

Banks have also made the most of strong market conditions to issue nearly 24bn of Additional Tier 1 (AT1) bonds, beefing up their capital levels and improving their leverage ratios.

By selecting a 7% trigger, BPE’s upcoming deal will count towards the capital metrics the ECB will be applying in the stress tests, although a source at BPE said the aim of the issuance was to comply with Basel III regulations.

For investors, the deal could prove less attractive than BPE’s first venture into the AT1 market last October when it offered a 11.5% coupon.

Back then it priced a 500m low trigger (5.125%) bond. Given the bank’s Common Equity Tier 1 (CET1) ratio of 10.28%, that meant a capital buffer for investors then of over 500bp.

This time around investors are more exposed to the risk of conversion: the higher trigger means a buffer of less than 370bp.

However, market conditions for the issuer could prove ideal. The cost of insuring subordinated debt is now hovering just above a six and a half year low, with the iTraxx Subordinated index at 89bp on Friday, down from 530bp at the end of 2011.

Spreads on AT1 bonds also rallied 25bp-50bp across the board following the ECB’s rate cut and targeted LTRO announcement on June 5. For peripheral issuers, the moves have been even more dramatic.

Banco Popular Espanol’s 500m AT1 now yields 6% - just over half the 11.5% yield the bank paid to get the deal done in October.

Market observers say the outstanding issue will provide a good starting point for gauging value, and suggest the new deal is likely to be marketed in the 7% area, with possible final pricing tighter in the 6% yield range.


The new issue will mark another step in the lender’s rehabilitation in the bond market following Spain’s financial crisis triggered by the 2008 property market crash. That left several banks with gaping capital holes after the government enforced writedowns on real estate holdings.

Some had to be bailed out by the state, while others like Popular escaped that fate but required a 2.5bn capital hike last year.

It is still rated below investment grade at Ba3/BB/BB+ at the senior level. The CoCo will be unrated. (Reporting by Aimee Donnellan; additional reporting by Jesus Aguado; Editing by Alex Chambers and Julian Baker)

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