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UPDATE 3-UBS makes first move in battered European AT1 market
March 14, 2016 / 8:30 AM / 2 years ago

UPDATE 3-UBS makes first move in battered European AT1 market

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By Alice Gledhill and Helene Durand

LONDON, March 14 (IFR) - UBS found over US$8bn of demand for Europe’s first Additional Tier 1 bond since mid-January, giving a much needed boost to the asset class after a severe sell-off in the first two months of the year led some to say that the product was unviable.

The market for Additional Tier 1 instruments from European lenders was shuttered after severe volatility and global macro headwinds buffeted the sector, and investors were also worried about banks’ ability to pay coupons on the debt.

The Swiss bank priced the US$1.5bn perpetual non-call five-year at 6.875%, inside initial price thoughts of 7%-7.125% and in line with where the bank sold a US$1.5bn perpetual non-call 10 in July 2015.

The bank made the most of investors’ renewed appetite for risk after the ECB announced new stimulus measures last Thursday.

“We have seen a pretty broad based rally across credit, with bank senior, bank capital, corporates, high-yield and emerging markets all feeling very positive,” said Alex Menounos, head of EMEA investment-grade syndicate and co-head of FIG FICM coverage at Morgan Stanley.

“The ECB corporate bond purchase programme is a real game-changer, the rally feels widespread and has been embraced by investors.”

Riskier bonds have rallied since the ECB meeting, including UBS’s own Additional Tier 1 paper. A 5.75% euro transaction was bid at a yield of 5.047% on Monday, down from the 7.4% peak it hit in the middle of February.

Bank of America Merrill Lynch’s CoCo index has recovered and was quoted at a yield of 6.26% according to Eikon, down from 7.25% in mid February.

Bankers on the deal said investors were increasingly willing to buy Additional Tier 1 paper again after reducing or exiting positions earlier in the year.

Early in January some bankers had forecast as much as 10bn of Additional Tier 1 issuance by the end of the first quarter, based on full-year issuance forecasts of up to 40bn.

However, Intesa and Credit Agricole were the only issuers to squeeze in deals before the sell-off.

A lead banker on the UBS transaction put the new issue concession at around 50bp at the starting level. “I would have thought we’d start wider, but the rally has really helped us.”

Since Thursday’s open, Markit’s iTraxx Subordinated Financials index has tightened around 45bp to 165.5bp, according to Tradeweb prices.


Despite improved sentiment, a rival banker nonetheless thought it was a “punchy” move by UBS.

“We’ve only really had two days of a market rally, and AT1 has lagged somewhat. But let’s see, it’s a good name to help the market reopen,” he said on Monday morning.

Looking further ahead investors remain more circumspect.

“We do expect credit to grind tighter, though over the longer term, investors should be cautious. The concerns around China, higher default rates have not gone away and we expect conditions to still be challenging during the course of the year,” said David Riley, head of credit strategy at BlueBay Asset Management.

Under the terms of the deal, bonds will be written down if the bank’s Common Equity Tier 1 ratio falls below 7%. (Reporting by Alice Gledhill, Helene Durand, editing by Julian Baker, Sudip Roy)

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