UniCredit: Quality over quantity

Italy’s UniCredit launched its second AT1 transaction, a Eu1bn issue, into a hesitant post-summer market at the beginning of September. Here, Waleed El Amir, head of strategic funding and portfolio at UniCredit, gives his take on the changing dynamics of the market, how order books are evolving, and what this means for execution strategy.

What was behind the timing of your Eu1bn AT1?

Waleed El Amir, UniCredit: There were effectively two windows where we felt you could bring an AT1 transaction: in September, or you would have to wait until after the AQR results. Even after the AQR results come out you’d probably have to wait a couple of weeks further as the market digests them. Meanwhile, we thought there would potentially be less supply in September than in November because a lot of people would have had to work through the August period because it takes a long time to get the documentation up and running. Hence we thought September was a better window to issue.

The last thing that happened before the summer was BES and one of the Spanish banks had to reverse its plans to issue at that time. Were you concerned that there would be any lasting impact?

El Amir, UniCredit: BES was a less relevant event. It was very idiosyncratic rather than systemic. Before any state aid can come in, all the capital has to be effectively written off and that capital includes Lower Tier 2. So I think BES was irrelevant.

I think the Spanish transaction you are alluding to had different issues. It was a smaller bank that was trying to do an AT1 deal with a 7% trigger, which was always going to be much more difficult because people were beginning to second guess whether you are trying to front-run the stress tests or not. What didn’t help that issuer was that it had done its first deal with a 5.125% trigger and then increased it to 7%. So there were different dynamics at play here.

So I don’t think either of those issues really impacted our deal.

Overall, did you feel that the market was in good shape?

El Amir, UniCredit: To say it was in “good shape” would be overdoing it. It was in OK shape. The thing that really spooked the market was the fact that the asset class, at least in terms of cash price and spread, was very volatile. In August you basically saw securities go from a cash price of 110 to 101 on very thin trading volumes. And a lot of accounts that had quite large positions in the product, when they tried to sell they realised that it wasn’t so easy to get out of those positions. And the fact that the asset class was so volatile and people were having to mark to market their positions, and that there was not liquidity in the market, was one of the main driving factors why books were lower than they had been historically.

That was quite a change, to see the market reopen with books of that magnitude, even if nobody expected the massive books we saw at the start of the year.

El Amir, UniCredit: Clearly there’s a very different dynamic in terms of the books. If you look at our own deals, the first deal had a book of 8bn, the second had a book of 2bn. What was happening in the earlier deals is that there was a lot of order inflation — and the size of book doesn’t tell you how a deal’s going to trade in the secondary market. We have seen a lot of deals have huge order books but trade poorly in secondary because they had a lot of fast money that got allocated. The key is actually to have good buy and hold investors buying your paper so you don’t have a lot of loose bonds. So we have seen quite a different dynamic between where our deal had traded versus other transactions, resulting in us outperforming other comparables in the secondary market.

Are you happy with how the deal went?

El Amir, UniCredit: I’m very happy, although competitors didn’t make our lives easy at all.

Were there any particular structuring considerations on this AT1?

El Amir, UniCredit: No. I think we wanted to give investors the most investor-friendly instrument that we could, and that’s with a 5.125% trigger — lower than the 7% — and a write-up/write-down structure, which is in my view the best structure we could basically offer to the market.

There was an expectation that the pipeline was building and investors sometimes talk about that as a factor in their considerations. Was that a factor in the execution of your deal?

El Amir, UniCredit: Certainly, I think that’s right, that there is quite a lot of supply coming from the banks, and the week after that we did see HSBC and CASA in the market. But I think it ultimately returns to the question of whether people like the credit or not, and if they want to get exposure to it. The really big factors were the volatility in the asset class, the lack of liquidity in the market, and the fact that we priced the day after Santander when effectively a deal had traded pretty poorly in the secondary market, which makes life pretty difficult. Supply was a factor, but a lesser factor than the other three.

Your last issue was in dollars — why did you choose euros this time?

El Amir, UniCredit: I think it’s less about currency and more about what the market is doing. In a bull market people will buy whatever currency. Most of the large investors that are buying AT1 product are currency-agnostic, so they’ll happily buy euros and they’ll happily buy dollars. It is more about market timing, right?

The way some transactions have been sized is another element. We did Eu1bn versus Santander doing Eu1.5bn. Barclays has done deals as large Eu3bn. Investors at the moment do not like large deals because it just means that there are potentially more loose bonds, and it doesn’t take a lot of sellers to really move a price very much in a thin market. So all those things are much more important than the currency chosen.

We decided to do euros because we had done dollars previously and it was just a way for us to diversify the investor base, for example we had much larger French participation in the euro deal versus the US dollar deal. We are likely to pursue a diversification process as we continue to fill up our AT1 basket, issuing a combination of dollar and euro transactions.

What can you tell us about any targets you have in terms of AT1 and what we might see from UniCredit going forward?

El Amir, UniCredit: We have told the market that we would like to do more. Some banks have significantly accelerated their plans. CASA has done four trades so far in the space of 12 months, Santander has done three. What we said to the market is that we would like to be a little bit more controlled in terms of the pace, so one to two deals a year is what we are planning to do right now.

Any final takeaways?

El Amir, UniCredit: We were happy with the deal in the end, because I think the most important thing was the secondary performance. It was not an easy market, but we are very happy with the performance. Post-deal I spoke to the top five investors — some of whom also invested in the previous trade — and they were very happy with the way that it was handled and how it has traded in secondary. That for us is always the key factor at the end of the day because people look at all kinds of statistics, but secondary trading performance is where investors ultimately make the decision to come back and invest in with you or not. That is the litmus test for us.