Hopes remain high after DB, Bankia top off H1

A high pace of activity led to just over Eu31bn of euro bank capital supply hitting the market in the first half of the year, nearly 10 times that from the first six months of 2013, but plenty more is said to be in store, with Dutch and Scandinavian AT1 firsts eagerly anticipated, for example.

Euro bank capital issuance stood at Eu31.5bn at the end of June, up Eu27.9bn from comparatively measly Eu3.6bn H1 2013 volumes, as regulatory clarity and bullish markets combined to pave the way for a surge in supply this year. And this is without even taking into account deals in US dollars and sterling from European banks.

A syndicate official said that issuance volumes have already outstripped expectations, but that Tier 2 supply should increase considerably and that the AT1 market is poised to grow.

“Everyone is expecting the Scandis to come and I’m sure after Deutsche other Germans will look at the market, too, and then there are also lower tier banks that could do deals,” he said. “I expect supply to continue.”

Deutsche Bank opened the German market on 20 May with a three currency issue totalling some Eu3.5bn — the biggest AT1 to date. Split into Eu1.75bn perpetual non-call six, $1.25bn perpetual non-call eight and £650m perpetual non-call 12 tranches, the German national champion’s landmark transaction attracted an aggregate order book of over Eu25bn equivalent, comprising over 1400 orders from more than 630 investors, leaving the issuer pleased with its multi-currency strategy.

“Given our Eu5bn AT1 target, this allowed us to take a very significant step to achieving this target with a Eu3.5bn issue while avoiding overloading any individual tranche and hence not jeopardising the secondary market performance,” said Jonathan Blake, global head of debt issuance at Deutsche Bank.

Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, noted that at the time the transaction was the tightest across currencies in spite of the record volume.

“There is always a bit of magic surrounding the Deutsche signature and the issuer made a strong statement,” he said. “The outcome in terms of all-in cost was impressive and you got the feeling that people forgot about metrics.

“Other issuers will benefit from a similar situation, with strong technical supports predominating in the market.”

(See Made in Germany feature for more.)

The clarification of tax treatment in Germany unlocked Deutsche’s AT1, and, with similar progress being made in the Netherlands, the first Dutch issue is awaited.

In Scandinavia, while Danske Bank has priced an AT1 other Nordic banks have yet to raise capital via new style contingent capital (CoCo) instruments. Swedish banks have, nevertheless, been active in the Tier 2 market this year, most recently SEB with a Eu1bn 12 year non-call seven deal at the end of May. (See separate Market News article.)

The syndicate official said he does not expect weaker issuers to have difficulty accessing the hybrid capital market, noting that a Banco Popular Español AT1 is trading at 6% after having come at 11.5% in October.

“The performance has been incredible,” he said. “As long as you pay a decent concession you can do deals.”

The potential for financial institutions away from national champions to tap into the bullish subordinated debt market was amply illustrated by Spain’s Bankia in May when, one year on from having bailed in junior bondholders following its bail-out, it was able to raise Eu1bn of Tier 2 debt in the form of a 10 year non-call five issue priced at 316bp over mid-swaps.

“What happened with Bankia was quite spectacular,” said a DCM banker. “They went through a rights issue where the existing shareholders were almost wiped out and then the Tier 1 and Tier 2 bondholders were bailed-in.

“But since then they have been able to return to the markets and issue this subordinated debt.” (See Q&A for more.)

Further supply could also come from some of the more developed countries for Basel-III compliant capital instruments, according to market participants. French national champions Crédit Agricole and Société Générale have already played a leading role in AT1 issuance, but BNP Paribas is now being touted as a likely issuer in the wake of a fine of almost $9bn (Eu6.6bn) by the US authorities announced at the end of June.

“The French bank should weather the near-$9bn fine for breaching US sanctions with proscribed states — and may even be compelled to issue attractively-priced debt in response,” said Filippo Alloatti, senior credit analyst, financials, at Hermes Fund Managers.

In a sign that the bank capital market is maturing, deals priced later in the first half of the year are not trading as high on a cash basis as those from the first quarter, according to the syndicate banker.

“The AT1s from the beginning of the year have rallied dramatically and apart from a couple of deals are trading above 104 or in that area,” he said, identifying a Nationwide Building Society sterling and a KBC euro deal as exceptions.

CoCos priced from around May onwards, meanwhile, are not trading as high — at around 99-101.

“A lot of the performance has already gone, but more importantly it is easier to spot where a deal should be coming,” he said. “The market is slowly maturing.”