Bank of Ireland in AT1 debut despite turmoil

Bank of Ireland sold its first Additional Tier 1 issue in the second week of June, a Eu750m perpetual non-call five issue that was more than seven times oversubscribed even as high rated issuers struggled to cope with a deteriorating market.

The deal is only the second AT1 from Ireland, after Permanent TSB sold a Eu125m club-style deal in April.

Leads Bank of America Merrill Lynch, Credit Suisse, Davy, Deutsche, Morgan Stanley and UBS took more than Eu5bn of orders for the Eu750m deal and were able to tighten pricing from initial price thoughts of the 7.625% area to 7.375%. Almost all, 98%, of the paper was placed internationally.

“This is yet another milestone in the bank’s evolution,” said Sean Crowe, group treasurer, Bank of Ireland. “The significant international demand for this transaction underlines the continued investor confidence in the bank’s progress.”

The transaction, rated B2/B-, has temporary write-down loss absorption at a 5.125% CET1 trigger.

The Irish success came on the Thursday of a week that, after a promising opening, had become increasingly difficult for execution across the spectrum of bank instruments, with a deteriorating market progressively affecting the pricing and book sizes of deals from covered bonds to AT1.

Landesbank Baden-Württemberg had hopefully opened the subordinated euro market on the Tuesday with the first Tier 2 issue since mid-April, going out with a 10 year bullet. However, with market conditions starting to deteriorate the Eu500m deal was priced flat to IPTs, at 240bp over mid-swaps.

According to Jörg Huber, head of funding and investor relations at LBBW, the issuer had been looking to issue — in either dollars or euros — since April, but only came to market after getting a variety of preparations out the way, such as updating its EMTN programme, announcing its Q1 results, and roadshowing — and navigating a variety of public holidays.

“Early on in the process, the markets were still quite receptive, such that a transaction was easily doable,” he said. “We did quite an intensive roadshow in Asia and Europe, and received positive feedback.”

However, after the roadshow a further technical hurdle then had to be overcome before issuance, and Huber said that in the meantime sentiment worsened and investors became more hesitant.

“We already got some kind of vibe that they are a bit more cautious and that in the volatile market they would expect a higher new issue premium, which is normal,” he said. “And then we had to take the decision what we would do: are we prepared to pay a bit of a higher new issue premium, or wait until markets are calming down?

“And we came to the decision that, OK, we were prepared to pay the additional new issue premium which would be necessary because with a pipeline building it was quite clear that markets and levels would certainly not develop in a more favourable environment again for the time being. But we were also prepared to postpone the transaction if things deteriorated completely.”

But despite checking on Monday that investors would still be on board, demand fell short of expectations as the deal hit the market on the Tuesday.

“On Tuesday morning nothing had changed in comparison with the day before and the feeling was that with the feedback we had and with IPTs of 240bp it would be attractive enough for all the investors to come in, and even to get a bit of momentum to perhaps price a transaction inside the 240bp area,” said Huber. “But it turned out that what we been told didn’t come through and this was one of the somewhat rare days when the feedback and intelligence you have changes exactly at the time that you go forward.

“The transaction was subscribed, but we didn’t have enough interest in the order book to have momentum and bring the pricing down a bit. And it turned out that it was one of the last transactions that could be done at decent levels, because the market more or less turned sour and shut down.”

Indeed when BNP Paribas launched a long-awaited debut AT1 the next day, a Eu750m perpetual non-call seven deal, it also priced its issue in the middle of IPTs, at 6.125%, on the back of an order book modest by AT1 standards, while in the senior market Credit Suisse dropped a proposed 10 year tranche from a senior HoldCo offering, instead pricing only a Eu1bn three year FRN.

Others chose to steer clear of the market altogether, with Pohjola, for example, delaying a Tier 2 deal it had announced on the Monday and which had been expected that week.