Investors rush to first UBS euro CoCo

UBS priced the first euro CoCo transaction of the year on 6 February, a Eu2bn 12 year non-call seven low trigger Tier 2 that was more than five times oversubscribed to underscore the growth in demand among the euro investor base for the new type of subordinated debt.

The deal is the Swiss bank’s fourth contingent capital issue but its first in euros, with CoCos rare in the single European currency overall as issuers have favoured the US dollar market.

Only a handful of banks including Barclays and Credit Suisse had previously tapped the euro market with contingent capital instruments, the Swiss bank having done so in September with a Eu1.25bn low trigger Tier 2 and the UK bank in early December with a Eu1bn AT1 issue.

UBS launched its deal two days after announcing its fourth quarter results, which were better than expected. An 11-strong lead manager line-up first marketed the deal at 345bp-350bp over mid-swaps, with more than Eu10bn of orders placed and the size and spread fixed at Eu2bn and 340bp over, respectively, for a coupon of 4.75%.

UBS acted as global co-ordinator, alongside bookrunners BBVA, Deutsche Bank, Commerzbank, Crédit Agricole CIB, Lloyds, RBS, Santander, Société Générale, UniCredit and VTB.

At 340bp over, the deal was priced at the tightest spread to swaps ever for a CoCo, noted Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB.

“This is excellent news for the euro market and we have more clear evidence that CoCos do not need to be US dollar denominated,” he said. “The euro market investor base is getting more mature every day, with UK accounts leading the pack thanks to their capacity to buy in US dollars but also in euro for size.

“The growing participation of some key French real money accounts is also very encouraging for the growth of the asset class in euros.”

Some 550 accounts participated in the transaction. The UK took 46%, France 11%, Switzerland 11%, Germany and Austria 11%, southern Europe 6%, Nordics 6%, the Benelux 6%, Asia 2%, and others 1%. Managed funds bought 63% of the securities, private banks 11%, insurance companies 11%, hedge funds 9%, banks 3%, corporates 1%, and others 2%.

The deal was the first of any type from a financial borrower that week, with volatile market conditions having kept any new issue projects at bay before UBS broke the ice, tapping the market before a monthly European Central Bank meeting and US non-farm payrolls the following day.

The timing of UBS’s transaction was arguably therefore not obvious, but its relevance was superseded by the demand overhang for high yielding low beta supply, according to Hoarau.

“Too many are just sitting on a mountain of cash, which is costly, and are therefore forced to buy in,” he said. “It’s a high quality signature from a safe haven country with a very nice coupon, so you can’t miss out on such an opportunity.”

UBS’s 12 year notes feature a contingent writedown that is triggered at the earlier of a breach of 5% Common Equity Tier 1 (CET1) or the point of non-viability. The buffer to the 5% trigger was 13.9% or Sfr31.7bn (Eu25.91bn) at the end of the last quarter, which Crédit Agricole CIB financials analysts said was a “very comfortable” cushion, including CET1 and high-trigger CoCo securities.

As of the fourth quarter of 2013, UBS has a Basel III CET phase-in ratio of 18.5% and a Basel III phase-in total capital ratio of 22.2%. The Tier 2 hosted CoCos count as “progressive capital”, according to the leads, assisting UBS in meeting new Basel III and Swiss requirements for systemically relevant banks in 2019.

According to a syndicate official on the deal, secondary market levels for Credit Suisse’s low trigger 2020 Tier 2 issue were the main pricing comparable for UBS’s inaugural euro CoCo, and were trading at around 330bp over. The curve extension and a new issue premium together called for some 15bp additional spread, with a few basis points deducted for the credit spread differential between the two Swiss banks, he said.

As BIHC was going to press, Spain’s BBVA on 11 February priced its inaugural euro Additional Tier 1 (AT1), a Eu1.5bn perpetual non-call five low trigger CoCo that was swamped with Eu14bn of orders from some 600 investors.