BBVA euro shows recovery

After in April 2013 becoming the first European bank to price an AT1 — in US dollars — BBVA on 11 February priced a Eu1.5bn 7% perp non-call five AT1 CoCo. Erik Schotkamp, director, capital and funding management, at BBVA, spoke to Susanna Rust about the key takeaways from the transaction, which he said leaves no doubts about the existence of a euro CoCo market.

Why did you opt for euros for this transaction and did you consider the US dollar market?

The most important thing here is that we have a euro-denominated capital base, predominantly, which means that in terms of filling the Additional Tier 1 requirements it is natural for us to do that in euros. The second reason is that when we did our first AT1 transaction in April last year it was unclear whether there was an existing euro market and until that moment issuance had predominantly been in US dollars. Since at that point we were doing a transaction that was the first CRD IV compliant issue we considered that it would be better to use available liquidity pools whose existence had been proven.

Now in the course of the six to nine months that have gone by since then we have clearly seen an increase in appetite among investors for the product and in the context of recent developments in the euro market with respect to order books and the success of transactions it proved to be the right decision to opt for euros.

Your first US dollar AT1 had multiple triggers — how did you simplify the structure for the euro CoCo and why?

The simpler structure is the direct result of the fact that as of today in Spain we are operating under the CRR. On 5 February, a day before we announced the transaction, the Bank of Spain effectively announced that all regulation previous to CRR/CRD IV had become void, so that made it very straightforward to do this under a simplified structure that is the standard going forward if I am not mistaken.

This made it possible to cancel effectively the transitional triggers that we had in the previous instrument and simplify that instrument, as well to create a situation where both instruments are more comparable with each other in terms of what they offer and what the structure is.

Your euro AT1 has the same non-call five structure as the US dollar notes. Did you consider a 10 year call?

No, we did not consider a 10 year call, the reason being that although the headline coupon has come down significantly we still believe that over time there are improvements to be expected on the credit spread. We figure that the situation going forward, not only with respect to Spain but also in terms of the credit rating of the group, is on the path of improvement, which means that there is no economic sense to lock in current spreads for a period longer than necessary from a regulatory point of view.

You roadshowed in Asia despite the deal being euro denominated — why is that?

For our transaction in dollars we made a big effort in Asia. With respect to the international profile of BBVA and having access to various funding sources it is good to see fixed income investors around the globe. This was a good opportunity to reinforce those efforts.

The second reason is that we have understood that there is still a decent holding of the previous transaction and also, as we saw in the case of Barclays, there is a reasonable take-up of euros in Asia. It’s probably not as spectacular as the first CoCos we saw about a year-and-a-half ago that were dollar denominated and Asia oriented, but there is still a good take-up.

We distributed around 10% of the deal to Asian accounts so roadshowing there was really worthwhile. You can see from the feedback from the Asian accounts that they do follow the credit and we obviously have an interest in raising the profile of the group and leveraging that interest.

The 5.125% CET1 trigger will have to be applied at both bank and consolidated group level. What is the reason for that and does it reflect any current uncertainty about exactly how much of deferred tax assets will be reclassified?

These are two separate items. The reclassification of the deferred tax assets is purely related to core capital and so there is no interaction between AT1 and the deferred tax assets as such. What is the case is that BBVA SA is the issuing entity and is regulated in Spain as a Spanish bank and owner of the operations outside of Spain, further we are regulated at the consolidated level. So it’s a result of the structure of the group and about achieving maximum regulatory computability and complying with AT1 both at consolidated level and the bank (issuer) level.

The euro AT1 was seen as offering a fairly “healthy” new issue premium, with some market participants seeing fair value in the high 6% — what influenced the approach to pricing?

There’s a mixture of things going on. BBVA wants to be a repeat issuer and it is therefore important that you build up a good base of investors, particularly a number of key and anchor accounts in these transactions. Obviously we had a fantastic book of over 600 lines of subscription. But although the book was spectacular what you need is the participation of a group of core accounts. And it’s around their sensitivity to pricing that you need to anchor the transaction. It’s about finding a compromise between a successful deal, repeated access to markets in the future, getting anchor investors on board, and taking into account their price sensitivity and our obvious desire to be minimising costs.

What are the key takeaways from your euro CoCo in your opinion?

The first key takeaway is massive sponsorship for the group and its fundamentals. There is a group of followers of BBVA that not only from a perspective of static capital ratios appreciate our strength but also appreciate BBVA for our capacity to generate operating earnings and as such our capacity to effectively protect bondholder interests.

The second key takeaway is that with respect to the discretionary nature of the coupon payments it is important that we made a commitment and we’ve explained as clearly as possible our philosophy with respect to how we see the discretionary distributions taking place.

And thirdly what I think with this transaction has become very clear is that if you look at the book what we see is a lot of so-called long only money that a year ago or half year ago would not even have had the mandate or been willing to consider CoCos, that somehow have become confident with the structures, that have mandates in place. I take a lot of encouragement from the fact that the big learning point here is that a euro CoCo market does exist, it absolutely does.

And what are your impressions about sentiment toward the Spanish banking sector?

I think a broad consensus has been building up in the last few months that Spain is bottoming out. Work still needs to be done, but the biggest deal risks have been removed. And in the context of relative value that means that many institutions such as ourselves, national champions, offer an enormous amount of value, certainly for the investors we were talking about.