Greenshoe promises greater AT1 stability

UBS used a greenshoe on an Additional Tier 1 on 13 February, including the option for the first time on such an instrument in a bid to improve the performance of AT1s by allowing lead managers to better support new issues.

After a two day European roadshow, UBS Group issued $3.45bn of CoCos split into $1.15bn perpetual non-call five and 10 tranches as well as a Eu1bn ($1.15bn) of perpetual non-call seven. Its investment bank – as sole bookrunner – then increased the two dollar tranches to $1.25bn apiece at the re-offer price through the greenshoe of up to 10%, taking the total issue size to $3.65bn.

The greenshoe option was touted as giving the lead greater confidence and ability to short the paper and stabilise the issue, with a 5% limit on short positions under the Market Abuse Directive cited.

“Launching the transaction with the greenshoe feature helped to significantly assuage some investor concerns around short term secondary marketing performance of recent Additional Tier 1 offerings, leading to incremental demand during the ongoing bookbuild process,” said UBS.

The three AT1 tranches were priced inside initial price thoughts on the back of large order books: the $1.15bn perpetual non-call five high trigger at 7.125% after IPTs of the 7.25% area with demand over $4.5bn; the $1.15bn perpetual non-call 10 low trigger at 7% after IPTs of the 7.125% area and $5.25bn of orders; and the Eu1bn perpetual non-call seven low trigger at 5.75% after IPTs of 5.875%-6.000% and books exceeding Eu4.7bn.

On 23 March HSBC Holdings followed UBS’s example on a $2.25bn perpetual non-call 10 AT1 that was increased to $2.45bn with the exercise of the greenshoe (see separate article).

Mariano Goldfischer, global head credit trading and syndicate at Crédit Agricole CIB, said that the technique can limit the performance of AT1s to the downside but also the upside.

“In a bull market, the bond could underperform the broad market as syndicate has the free option to exercise its greenshoe rather than reach into the secondary market – potentially to the detriment of investors,” he said. “In a bear market, the bonds will outperform as there will be a good bid from syndicate due to a potential need to cover a short via a secondary market bid.

“At the end of the day, it is the job of the syndicate desk to have a good read of the market and price appropriately to make sure the bonds performs and issuers don’t leave too much on the table,” he added, “and overall the greenshoe is of greatest benefit to the syndicate. But you can also argue that it is beneficial for investors to know that there will be a bid in the secondary market if the market deteriorates.”

Given the volatility witnessed in the asset class, AT1 investors looked on the positive side of the initiative.

“We see it as a strong signal to the AT1 market,” said Dan Karsenty, portfolio manager and vice president, Eiffel Investment Group, “helping dealers stabilise new issues and reassuring investors on price stabilisation amid contained volatility. In 2014, AT1 proved to be a very volatile asset class and the repricing, as well as the scarcity of liquidity the market experienced in H2, pushed investors to be more cautious when looking at the AT1 market.

“The asset class is still growing and the investor base is still not set, so any help in stabilising prices on new issuances is beneficial.”