Hybrids sour into year-end after comeback

Bankers were expecting 2015 to come to an early end for bank capital transactions after a November resurgence in activity quickly fizzled out against the backdrop of poor sentiment and market participants were again left questioning the level of support for hybrid capital going forward.

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Sweden’s SEB on 6 November reopened the Additional Tier 1 (AT1) market with a $1.1bn perpetual non-call 5.5 year issue that was the first AT1 since Nordea in mid-September, and the success of the transaction (see separate article) raised hopes that — with the ECB’s Comprehensive Assessment also smoothly out of the way — the hybrid market could regain some of momentum it displayed early this year.

However, although issuers such as Deutsche Bank were able to return in mid-November, the market’s pick-up proved as fleeting as that of September, when a mixed bag of euro and dollar trades showed only selective demand for AT1s.

Deutsche Bank on 18 November priced a $1.5bn PerpNC10.5 AT1 with a 7.5% coupon, its second issuance of the instrument after a Eu3.5bn equivalent deal in euros, dollars and sterling that was the first AT1 out of Germany and the biggest to date. The German national champion had previously stated that it had a Eu5bn target for AT1.

Its previous issue had attracted an aggregate order book of some Eu25bn equivalent, and the new dollar issue attracted $3.6bn of orders from over 230 accounts. In spite of the respectable order book, the deal soon traded down, as did other transactions launched around the same time.

These included a $500m 10.5 year non-call 5.5 Tier 2 for Erste Group on 19 November, which was the first subordinated transaction from an Austrian bank since junior bonds of Hypo Alpe-Adria were hit by the Austrian government. An investor said that it was not surprising that demand for the new issue hardly covered the size of the deal.

“It feels very much like investors and traders have already closed their books for the year with flows being light in European financials, even by today’s anaemic standards,” added the investor. “CoCos drifted lower on the week.

“Nevertheless bond syndicates seem determined to launch a series of new issues into an unreceptive market before the window closes for the year. Therefore, it was no surprise that virtually none of these deals have performed.”

The situation turned even worse in the wider financial institutions market, as senior unsecured transactions for the likes of ASR, Nomura and Santander Consumer Bank, as well as a benchmark covered bond for AIB Mortgage Bank, were pulled.

Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, warned that the new year could also prove difficult, particularly with recent FSB TLAC proposals having increased supply expectations further.

“The liquidity situation remains intact,” he said. “But if investors anticipate oversupply they will react accordingly when it comes to positioning in primary. The first deals may go well, but if there is no secondary performance to be had, people will hold off and we could see spreads widen.”