KBC, Santander debuts give AT1 a reality check

Banco Santander and KBC Group made their AT1 debuts in early March with new issues that came up against the limits of a market that had previously gone from strength to strength, although bankers on the deals defended their execution.

Santander was out first, launching its transaction during what turned out to be the busiest week for European hybrid issuance yet and one that captured the frenzy in the nascent euro AT1 market well.

The Spanish issuer was in the market at the same time as Danske Bank, which was making its debut with a Eu750m perpetual non-call six, and came after Nationwide Building Society had the day before opened the sterling AT1 market.

Opening order books on 5 March on the back of an upgrade the day before by Moody’s, from Baa2 to Baa1, and a recovery of sentiment after the onset of the Ukraine crisis, leads Bank of America Merrill Lynch, Citi, Santander and UBS gathered some Eu15bn of orders for the Santander deal and priced it at 6.25%, the tight end of guidance of 6.25%-6.50%.

The hybrid instrument provides for loss absorption by converting into equity if CET1 falls below 5.125%.

A week later, on 12 March, Belgium’s KBC Group sold its inaugural CRD IV-compliant AT1 issue, a Eu1.4bn deal that would free up capital via a temporary write-down if a low CET1 trigger is breached.

Leads Goldman Sachs, JP Morgan, KBC, Morgan Stanley and UBS built an order book of around Eu7bn — five times oversubscribed — with some 369 accounts participating, according to a banker on the deal. The AT1 security was priced at a yield of 5.625%, stealing the record for the tightest euro AT1 to date from Danske, which had the week before sold its deal at 5.75%. KBC’s deal, however, was priced at the wide end of revised guidance, of 5.5%-5.625%.

The deal marked a turning point in the short history of the young CRD IV-compliant AT1 market, with the Belgian issuer alongside Santander a week earlier being seen by some as having pushed pricing too far and taken too much out of the market, leading to a disappointing performance in the secondary market and a weaker primary market as investors reassessed their views on and involvement in the market.

Indeed, KBC’s deal was the last of what has been referred to as a flood of AT1 issuance in the first two-and-a-half months of the year, with a two week hiatus after its deal before new issuance resumed.

A trader said that KBC’s transaction, which was tightly priced and increased, was one of the triggers for a sell-off in the AT1 market and that, at the time of writing, its AT1 was the only one of the recent batch of euro issues to be trading below par despite the market having recovered from a weakening that had dragged many deals to below par in the secondary market.

“Santander was very heavily hit,” he said. “It was priced too tight versus BBVA’s issue before and there was also some technical trading between the two.”

“The market has settled now, though, mainly because there hasn’t been much supply. It will be interesting to see where Deutsche comes out.”

Germany’s finance ministry in early April clarified the tax regime for certain contingent capital, paving the way for the country’s banks to raise CRD IV-compliant hybrid capital, and a debut issue from Deutsche Bank has been widely anticipated. (See here for more.)

KBC ‘at the right price’

A lead banker on KBC’s deal said that it allowed the issuer to meet the regulatory requirement for 1.5% of risk weighted assets to be covered by AT1 capital, and that there “was a clear desire from top management to do this in one shot”.

The issuer noted that the AT1 provides more efficient funding of its capital base and that it will use it to replace legacy Tier 1 instruments upon the next possible call dates.

The lead banker said that, at 5.625%, the AT1 issue came “at the right price”.

“We were convinced the deal was a great one,” he said. “It was a big success and the market response was fantastic, reflecting the quality of KBC Group. It was very well appreciated by a big investor community — 369 different accounts in the book is not peanuts.”

Viet Le, FIG syndicate manager at Crédit Agricole CIB, said the outlook for KBC’s paper was better.

“The issuer is not supposed to come back to the AT1 market, so things could settle down in the secondary market sooner rather than later,” he said, “and a kind of scarcity effect should push the price up, unless further quality supply reprices the market at a wider level.”

A lead banker on Santander’s deal meanwhile acknowledged that it was followed by a softening in the market, but said that this was more a reflection of a shift in sentiment rather than of the deal itself.

“It’s hard to separate the two of course, but at the time it seemed the obvious place to price it with an order book that big, and no-one complained,” he said. “In the aftermarket it actually traded quite well, but a week later everything fell.”

He cited the trading of a well-received BBVA euro AT1 issue from mid-February to highlight that no bond was exempt from the change in sentiment, noting that BBVA’s deal also fell to below par in late March. He said that the new issue premium on Santander’s AT1 was “small”, suggesting that its performance has lagged that of BBVA’s partly because the latter offered a larger concession as the inaugural Spanish euro AT1. However, he noted that Santander’s AT1 issue has “slowly improved” from a low of 97.5 bid in late March to reach 100.75 at the time of writing.

 UniCredit taps sobered market

In spite of the weaker turn in sentiment, two weeks after KBC’s deal UniCredit showed that the AT1 market remained open for business — albeit with more sensitivity to the freshly discovered limits of investor appetite necessary and order books being smaller than earlier in the year.

The issuer on 27 March sold the first AT1 from an Italian bank, a US$1.25bn (Eu905m) Reg S perpetual non-call 10 that was priced at 8% on the back of some $8bn of orders.

Citi, HSBC, Société Générale, UBS and UniCredit were bookrunners. The issue provides for loss absorbency via a temporary writedown if CET1 falls below 5.125%.

Waleed El Amir, head of strategic funding and portfolio at UniCredit, said that the issuer is happy with the response to the bank’s offering given its Reg S, undated non-call 10 format and the market’s comedown from the heady heights reached earlier in the year.

“I thought our AT1 was absolutely critical because it was the first deal to hit the market after what I see as a big paradigm shift in the market,” he says. “It became clear that that order books were inflated, some deals were pushed too hard and didn’t trade well, and then more supply was being anticipated.

“We were very careful in the allocation of our AT1 and it traded up nicely after to demonstrate that it is about quality rather than quantity, so we are very pleased with the result.”

(See here for more.)

SG hits hat-trick after delay

Société Générale priced its third AT1 issue in less than a year, a day after UniCredit’s transaction, a Eu1bn perpetual non-call seven with a low trigger, temporary write-down structure.

The issuer had gone out with initial price thoughts (IPTs) two days earlier, but put the deal on hold after it was notified of a pending rating action.

“We felt we had no other option but to be transparent and so delayed further marketing of the transaction,” said a syndicate official at one of the leads — Banca IMI, Deutsche Bank, Crédit Agricole CIB and SG.

“It was extremely unfortunate in terms of the timing, but there was nothing that the issuer could do about it.”

The rating action in question was a Fitch revision of the outlooks of 36 EU banks to negative, including that of Société Générale, on the evening of Wednesday, 26 March. With UniCredit in the market on Thursday with its inaugural AT1 and Crédit Agricole anticipated the following week, Société Générale proceeded with its deal on the Friday. It picked up where it had left off, with IPTs of the 6.75% area. More than Eu5bn of orders were placed, with the leads setting the final coupon at 6.75%, the middle of guidance.

“It went well,” said the lead banker. “The book was more modest, but that was no surprise given the volatility there had been during the week, with some deals underperforming.

“It traded on the break at 100.5-101, which is the performance you want.”

The deal is Société Générale’s first euro AT1, after two dollar issues in August and December last year, and fills the issuer’s 1.5% AT1 bucket under CRD IV. The issuer did not go on a roadshow before the transaction because it had already priced two deals and felt that investors understood the structure, said the lead syndicate official, adding that the transaction did not suffer from that decision.