Aareal sells debut AT1 after postponement

Aareal Bank on 13 November became only the second German bank to issue an AT1, and did so at its second attempt, having postponed its transaction in September when market conditions deteriorated.

The German lender had been expected to issue Additional Tier 1 after the German finance ministry in April clarified the tax treatment of the new instruments, paving the way for Deutsche Bank to open the German sector in May. Aareal had previously said that it would seek to issue AT1 capital in conjunction with repaying Eu300m of remaining silent participation hybrid capital to SoFFin, the German government’s Financial Market Stabilisation Fund.

To this end, Aareal embarked upon a roadshow for a Eu300m temporary write-down 7% CET1 trigger issue on 19 September. However, the market quickly took a turn for the worse.

“The first day of the roadshow was a good day in the market,” said Tobias Engel, head of capital markets at Aareal Bank. “But from this day onwards spreads moved higher almost every day.”

In light of the deteriorating conditions Aareal postponed its issue, but nevertheless repaid the SoFFin capital in October.

“From our side we had no pressure to do it,” said Engel. “We repaid Soffin without issuing the AT1. So we then tried to find a good market opportunity to issue the bond.”

The market then awaited and digested the Comprehensive Assessment, with Fitch — which rates Aareal’s AT1 B+ — noting that the bank’s CET1 ratio of 11.4% under the ECB’s adverse scenario was the fifth highest of 16 rated German banks tested.

The bank waited until after it released its third quarter results on 11 November to return with its AT1 and by that time market conditions had improved.

“We took the earliest opportunity,” said Engel, “talking to investors the next day, with a conference call, and printing on the 13th.”

Leads BNP Paribas, Deutsche and HSBC went out with initial price thoughts of the 8% area for the perpetual non-call April 2020 issue and, with indications of interest approaching Eu1bn within two hours, released guidance of the 7.75% area. The final order book totalled Eu1.5bn, with over 180 accounts, allowing for pricing on the Eu300m issue of 7.625%, despite what a lead banker said was noticeable price sensitivity.

“It was finally a positive result,” said Engel. “We issued what we planned, Eu300m, on the back of a five times oversubscribed book.”

He was philosophical about the pricing that was ultimately achieved after the postponement.

“There were times when we thought it would be possible to print such a deal at a tighter level — but not in this market environment,” he said.

“The deal is trading around par,” he added, “and so it seemed we ended up with a fair market price for this bond.”

Germany was allocated 37% of the issue, the UK 31%, the Nordics 8%, Switzerland 6%, other Europe 11%, and others 7%.

”I think this was the highest German participation in percentage points of any AT1 transaction,” said Engel. “Ahead of the transaction we had not expected Germany to be so strong.

“We have the feeling that it was partly thanks to our reputation in Germany currently being quite strong that participation was higher.”

He said that there were several reasons why Aareal used a high trigger structure.

“An important one is that we wanted to achieve an efficient capital structure and, being a small bank and unlikely to be a regular AT1 issuer, the bond should also meet capital requirements in the coming years,” said Engel, “and there might be the risk that in the future low trigger instruments are not recognised as strongly as high trigger.”