Issue and be damned

Publish and be damned. Quite. With comic timing, our last issue of Bank+Insurance Hybrid Capital went to press with an iteration of an oft-used post-crisis rhetorical question: “Correction? What correction?”

That Banco Espírito Santo would collapse as the ink was drying on that publication was, of course, unpredictable. But perhaps the serious correction that followed over the summer was not.

The Portuguese bank’s woes may have been “idiosyncratic” (or simply idiotic) but it did not take a genius to see that the inflation of AT1 order books and prices was setting the market up for a fall. That duly arrived when BES combined with other factors to undermine the market’s props. Rising geopolitical tensions in Ukraine and the Middle East and the ejection of AT1s from key Bank of America Merrill Lynch indices made matters worse, and price falls and volatility were further exacerbated by forced sellers in a thin summer market.

But wait — didn’t Nordea just price an AT1 with the lowest coupon ever?

It is true that the Swedish bank’s 5.5% set a new coupon low only days after HSBC reminded us of the glory days of AT1 with a multi-billion book.

However, these investment grade gems may prove the exception rather than the rule in a market that has sobered up. Witness the difficulty faced by Santander in reopening the market, as shown by its disappointing aftermarket performance. That and other deals suggest that investors have learned that AT1 is no one way bet.

So while debutant, rare or highest quality issuers may still be able to reel in investors and yields, second tier and repeat issuers are going to have to tread a lot more carefully. Banks may well have to choose between price or size, and not be so greedy that they help themselves to both. If they do, the secondary market is likely to hold up their avarice for all to see.