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REFILE-UPDATE 1-UBS tests euro demand for low-trigger CoCos
February 6, 2014 / 11:06 AM / 4 years ago

REFILE-UPDATE 1-UBS tests euro demand for low-trigger CoCos

(Corrects typo in paragraph four)

By Aimee Donnellan

LONDON, Feb 6 (IFR) - Switzerland’s UBS is preparing to sell the first euro denominated contingent capital issue of 2014, gauging how deep investor demand in Europe is for this type of debt.

UBS, like most other banks, has favoured the dollar market to sell its low-trigger contingent capital issues. This transaction is 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 to sell these bonds.

According to Citigroup estimates, European banks could raise as much as EUR20bn and EUR45bn in Additional Tier 1 and Tier 2 respectively in 2014.

Having posted better than expected results on Tuesday, the Swiss bank begun marketing a 12-year non-call seven-year deal which can be completely written off if the bank’s Common Equity Tier 1 (CET1) ratio falls below 5%. UBS’s Common Equity Tier 1 ratio rose to 12.8% in the fourth quarter of 2013.

“We’ve seen a real growth in demand for euro CoCos in recent weeks and wanted to diversify into a new market,” said a DCM banker. “At this level we’re coming flat to where we would be able to price a dollar deal but are benefiting from a lot of real money interest from European accounts.”

Barclays and Credit Suisse are the only two other banks to have tapped the euro market with these new style instruments. A EUR1.25bn low-trigger Tier 2 contingent capital deal sold by Credit Suisse in September attracted EUR3.15bn of demand while a EUR1bn Additional Tier 1 for Barclays priced in early December attracted EUR12bn of orders.


The timing of the transaction may raise a few eyebrows as the ECB monthly meeting is looming later today. It is also the first from a financial in the European market this week as issuers have stayed on the sidelines because of volatile market conditions.

However UBS seems to have caught a rare break in a tumultuous market as the cost of insuring subordinated debt has fallen by 8bp to 143bp since yesterday’s close (level taken from Tradeweb).

Against this relatively supportive market backdrop, UBS acting as global coordinator, bookrunners Deutsche Bank, RBS, Commerzbank, Credit Agricole CIB, Santander GBM, BBVA, Lloyds, UniCredit, VTB, Societe Generale CIB began testing investor interest for the Tier 2 instrument at mid-swaps plus 345-350bp.

At this level, the bond is offering investors around a 10bp premium over Credit Suisse’s EUR1.25bn 5.75% low trigger total write-off CoCo that was deemed to be the most relevant comparable for pricing.

That bond priced at mid-swaps plus 400bp back in September of last year and was bid at mid-swaps plus 327bp pre announcement, according to a DCM banker.

UBS is more than half way to completing its low-trigger contingent capital requirement before its 2019 deadline, having already raised CHF5.5bn (USD6.08bn). It has still to raise CHF4.3bn (USD4.755bn).

Bankers involved in the deal say they have already attracted a lot of interest from investors that are likely to be buoyed by the bank’s better than expected results.

The Swiss bank said that it had benefited from a “transformational” year that saw net profit for the quarter reach at CHF917m (USD1.02bn) after it booked a CHF470m gain from deferring taxes. (Reporting by Aimee Donnellan, editing by Helene Durand, Sudip Roy)

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