Dutch enter new capital era

The Dutch Additional Tier 1 market kicked off in January when Rabobank took advantage of long-awaited domestic clarity over treatment of the instrument to open the market. Since then Dutch banks have been active across the capital structure, but they face renewed uncertainty over the next big regulatory steps. Neil Day reports.

When Rabobank launched a Eu1.5bn Additional Tier 1 transaction in January it could claim two impressive landmarks: the first AT1 from a Dutch bank, and the first AT1 of 2015.

However, thanks to the Dutch authorities lagging their European peers in laying the foundations for the CRD IV-compliant instruments, the issuer could only notch up these achievements after watching from the sidelines as the asset class developed through 2013 and 2014.

“If you look at what Rabobank has done historically, we have wanted to be one of the first into new markets,” says Rogier Everwijn, head of capital and secured product at Rabobank, “and we are referred to as quite an innovative issuer. So waiting for others to open the market was indeed frustrating to a certain extent.”

Rabobank had, after all, been among the pioneers of CoCos when it sold a $2bn deal in January 2011 that was the first write-down instrument in the evolving asset class. Holding it back in the latest hybrid capital revolution were the Dutch authorities.

“We were not able to issue earlier because there was a debate in the Netherlands about the tax deductibility of the coupons of AT1 instruments,” says Everwijn, “so that means that the whole issuance plans were delayed already over the course of 2014.”

The Dutch Ministry of Finance last June paved the way for Dutch AT1 by setting out proposals to amend the country’s corporate income tax act and following parliamentary approval the necessary legislation was in place for issuance to begin at the start of this year. And just two weeks into the year, on 15 January, Rabobank kicked off activity.

“The reason for us coming in January was just that we wanted to be one of the first out in the market,” says Everwijn. “We had seen basically zero issuance in the last quarter of 2014, and so to avoid any competing pent-up supply we wanted to go ahead as soon as possible in the year.

“Markets were not in an overly positive fashion in that period, but they were stable enough for us to go ahead and we were comfortable with the feedback from the roadshow,” he adds. “In hindsight, it was good timing, well ahead of the competition.”

Rabobank went out with IPTs of the 5.625% area for its perpetual non-call 5.5 issue and was able to tighten to 5.5% on the back of a Eu4bn book. Everwijn says that the result was as good as could have been hoped for, particularly given that on the day of launch the Swiss National Bank shook the market by announcing the removal of an upper limit on the strength of the Swiss franc, which led to renewed volatility and some investors deciding not to participate.

“In terms of pricing, the best comparable at that time was an HSBC transaction, and if you add in a new issue concession then we achieved the best outcome that was possible,” he adds.

Four years had passed in between Rabobank’s innovative CoCo in January 2011 and its first Dutch AT1, and Everwijn says that developments in investors’ attitude towards such instruments explained the choice of euros this time around.

“In 2011 that was basically the first Basel III-compliant structure and we issued in dollars because investors in continental Europe and also the UK were not ready to invest in these kinds of structures, so we were focusing on Asian high net worth private banking demand,” he says. “But since then we saw a lot of European banks in the euro market and the investor community was interested in investing in these structures.

“That made us wish to issue in euros to achieve the largest and deepest book.”

ING followed Rabobank into the AT1 space on 9 April, but opted for the dollar market and enjoyed a book of some $20bn for its $2.25bn debut. Issued by ING Groep and rated Ba3/BB, the deal was split into $1bn 6% perpetual non-call five and $1.25bn 6.5% perpetual non-call 10 tranches. The pricing was some 37.5bp tighter than initial price thoughts while some 55bp wider than where an HSBC $2.25bn perp non-call 10 priced in late March.

ABN sales across capital structure

ABN Amro debuted in the AT1 market on 15 September, selling a Eu1bn 5.75% perpetual non-call five issue. The move into AT1 came after the Dutch issuer had in June tapped the Tier 2 market and ahead of a long-awaited IPO on 20 November that valued the bank at some Eu16.7bn when NL Financial Investments sold a Eu3.3bn stake on behalf of the government.

“As you have seen, we have had quite a heavy calendar this year,” says Michael Tromp, head of capital management at ABN Amro. “We wanted first to have our Tier 2 instrument issued, and after summer started looking at an AT1 issuance to have this instrument done before a potential IPO.

“We have an old-style Tier 1 outstanding that will lose its capital qualification in line with the CRR grandfathering rules in Q1 2016,” he adds, “so then the 1.5% versus RWA bucket will be empty of Tier 1 instruments. So in order to optimise that part of the capital structure and also to benefit our leverage ratio it made sense to do an AT1 instrument.”

Although Dutch issuers were latecomers to what is by now a relatively mature AT1 market and ABN Amro was the third from the country after Rabobank and ING, important discussions with the regulator and investors remained, according to Tromp.

“Even if the instrument is in general better understood since we have seen many issues,” he says, “the AT1 structure in itself is of course very much related to the structure of the issuer and its balance sheet. And although we have cleaned the balance sheet up, it is for legacy reasons a bit more complex than some. Our AT1 structure, for example, has three different triggers, and refining the instrument and having discussions with the regulator takes some time.

“Most of the questions from investors on the roadshow were instrument-related,” he adds, “but also involving what our ambitions are on Total Capital and CET1 levels, the interplay between dividend payments and AT1 distributions, and such topics.”

ABN Amro’s temporary write-down AT1 has a 7% CET1 trigger at group level and two 5.125% CET1 triggers at the bank level, and was rated BB/BB+ by S&P and Fitch.

The perpetual non-call five issue was launched with IPTs of the 5.875% area and was priced in the middle of final guidance, at 5.75%, on the back of an order book of some Eu3.5bn.

The scarcity of ABN Amro AT1 versus its peers is identified by Tromp as a factor in the success of the debut.

“We don’t need a lot of AT1 if you look at the 1.5% versus RWAs of roughly Eu110bn-Eu115bn,” he says. “And in light of our profitability and leverage targets, AT1 supply from ABN Amro will be relatively limited in the coming years.”

“Investors had for a year already been asking when we were coming with our AT1, and I think that also materialised when we launched the deal in a lot of high quality names coming into the book.”

The deal also succeeded in the face of ongoing volatility.

“We had been looking at the market on an ongoing basis and from around May, June the markets weren’t that fantastic,” he says, “first with Greece and after that China, and during our AT1 the markets weren’t very smooth, either. So then you have to pay up a little bit and rely on your strength, and hope that the pricing will tighten from IPTs due to the quality and number of orders in the book.”

ABN Amro had undergone a similar experience with its Tier 2 issue on 23 June, when it sold a Eu1.5bn 10 year non-call five deal. The market for such debt had been closed for almost a fortnight on the back of rising Bund yields and Greek fears, but the Dutch bank had reopened the market with IPTs offering an enticing new issue premium of as much as 50bp to generate a book of some Eu8bn. The trade was ultimately priced 15bp inside IPTs, at 235bp over mid-swaps, before conditions soon deteriorated on the back of worsening Greek news again.

“We saw some trades that struggled to achieve their ambitions,” said Daniëlle Boerendans, head of long term funding and capital issuance at ABN Amro Bank, at the time, “so together with the joint leads, we decided that this was probably the best strategy and then to take it from there. In these kinds of markets, you should really choose the right execution strategy, that is to get investors’ attention and I think that ours was the correct approach.

“From the start, when we saw that there were Eu2bn of orders in the book after one hour, we were already quite happy,” she added, “and now we are even more pleased. I think it’s quite hard to get the timing right nowadays, but in hindsight we couldn’t have done it better.”

SNS makes comeback in Tier 2

SNS Bank chose a Tier 2 offering for its return to the capital markets on 29 October. The comeback came a month after ownership of the Netherlands’ fourth largest bank was transferred to the Dutch state in the latest move following the nationalisation of the SNS group in February 2013 – its privatisation will not take place until at least mid-2016, under government plans.

“It was known to the market that SNS Bank should return to the capital markets as soon as the SNS Bank was fully disentangled from SNS Reaal,” says René Genet, senior dealer, at SNS. “This was the case at 30 September, and markets were relatively supportive for an SNS transaction, so we decided to go ahead, on 19 October starting roadshowing through Europe.

“We tried to get over that SNS has a solid balance sheet and that we have shown a solid financial performance in 1H15,” he adds. “SNS is now solely a retail bank and the retail bank activities have been profitable throughout the years. SNS is targeting the Dutch retail client with mortgages, deposits and payments, and there are no ties left with commercial property and SNS Reaal Group.”

Genet says SNS chose to return via a Tier 2 instrument to further strengthen and diversify its capital base, with the 10 year non-call five format for the first issuance contributing to optimising the bank’s capital structure and supporting its credit rating by showing market access.

Leads Deutsche Bank, Goldman Sachs, ING Bank, JP Morgan and UBS opened books for the Ba2/BB/BBB 10NC5 issue with a level of the mid-swaps plus 375bp area before pricing the Eu500m 3.75% deal at 365bp.

“The transaction was very well received and gathered a Eu1.1bn order book,” says Genet. “Pricing the deal was a discovery process for all involved, but through intense communication we managed to print at the right level.”

Fund managers took 77% of the transaction, hedge funds 11%, banks and private banks 6%, insurance companies 5%, and others 1%. The UK and Ireland was allocated 64%, the Benelux 9%, Switzerland 7%, France 6%, Nordics 6%, Iberia 3%, Germany and Austria 2%, and others 3%.

Genet says that henceforth SNS Bank plans to be a frequent issuer in various instruments, although this will depend on the various regulatory developments facing the industry, such as bail-in and MREL/TLAC.

Regulatory positioning

Other Dutch banks are in the same position, awaiting regulatory clarity at the same time as doing their best to anticipate the exact shape of the incoming framework. And, naturally, they are also seeking to try to influence its form.

Rabobank, for instance, in September published a position paper on the then legislative proposal in Germany to change the hierarchy of claims in case of insolvency by subordinating specific senior debt instruments, notably senior unsecured bonds, to address Bank Recovery & Resolution Directive and MREL/TLAC issues. The bank said it understands De Nederlandsche Bank (DNB) with the ECB, the Dutch National Resolution Authority (NRA), and the Dutch Ministry of Finance to be analysing the German plan.

“BRRD was recently implemented in Dutch legislation in line with the EU directive,” says Laurent Adoult, FIG DCM at Crédit Agricole CIB. “The creation of a statutory layer of bail-in-able senior was not addressed, but we would not rule out a statutory solution at some point.”

Rabobank came out strongly against the German way, noting that it runs contrary to a position paper the Dutch bank had published back in July 2013.

“Rabobank is in favour of building up high capital buffers to protect all senior unsecured liabilities,” it said. “Additionally, Rabobank supports the approach whereby on a statutory basis losses can be spread over as many senior liabilities as possible — the so called comprehensive approach — to reduce the amount of losses on this category.

“This in contrast to the targeted approach, whereby only designated instruments can be written down. Rabobank thinks that by the German Proposal the price (cost of fund), but more importantly the availability of senior unsecured funding could be at risk as investors can step away from this asset class as risk (and reward) are not the same or could no longer fit the mandate.”

The Dutch bank has some Eu150bn of senior unsecured debt outstanding and it highlighted that a 50bp increase in spread could result in an increase in funding costs of around Eu750m per annum. It also noted that it had increased its Total Capital target from 20% to 25% on the back of TLAC proposals.

“Rabobank builds up high capital buffers to protect senior unsecured liabilities and additionally, Rabobank supports the comprehensive approach whereby losses can be spread over as many senior balance sheet liabilities as possible,” it concluded. “By this strategy, Rabobank aims to ensure access to funding through the cycle, also in volatile market conditions which is of high importance to Rabobank and banks in general.”

ABN Amro is meanwhile excluding senior debt from its MREL thinking.

“We are currently at a 6.4% MREL level, and that’s solely in subordinated form,” says Tromp, “and we aim — pending changes to regulations, laws, etc — to fulfil the 8% in subordinated debt, even if senior unsecured can count towards it.”

Adoult at CACIB identifies as another key regulatory development the proposed introduction of risk weight floors under “Basel IV”, notably for residential mortgages.

“The next thing for the Dutch banks could be the whole discussion around risk weights for mortgages because that’s really the heart of their businesses,” he says. “The linkage to loan-to-values that is being discussed could penalise Dutch banks, because in Holland these are structurally higher than in most European countries due to tax incentives.”

Indeed Rabobank has also come out against such developments, describing the move as “a big step back to Basel I” and saying that due to the anchoring of floors to a revised Standardised Approach there is a limited reflection of the underlying risk in the solvency requirement.

“It’s still not clear what the impact will be, with the Basel Committee and others reviewing the current state of play,” says Everwijn, “but I think that the direction of travel is clear: risk weights will go up — otherwise you would not undertake such a process.

“The big question is, by how much?”

According to Moody’s, the average risk weights of Rabobank’s mortgage loan book at the end of June was 12% and the rating agency in October estimated that based on a 25% risk weight under Basel IV the Dutch bank’s tangible common equity to RWA ratio of 16.6% would decrease by 181bp.

“Nonetheless, although 25% is the minimum boundary of the 25%-100% proposed range, which might make the final outcome more punitive for Rabobank depending on loan-to-value ratios, we believe that the outcome remains uncertain and that the final standards may be less constraining,” it added.

Moody’s said that the three largest Dutch banks will be particularly affected by the new rules because of the high proportion of their private sector loan portfolios comprised of residential mortgages: 47% for Rabobank, 52% for ING, and 54% for ABN Amro.

Tromp at ABN Amro agrees that a “one size fits all” approach to RWAs is misguided, further citing as an example how roughly one-quarter of the Dutch bank’s mortgage portfolio comprises Nationale Hypotheek Garantie (NHG) loans as well as the low impairments on the mortgage portfolio through the crisis.

However, he anticipates a long phase-in period and some local discretion if the regulation is implemented in a certain form.

“The BIS proposals have been commented on and we need to see in which form a final proposal will be implemented in Europe,” says Tromp.

“We are quite conservative at the moment with our CET1 ratios,” he adds. “We are currently operating at a CET1 ratio of just above 14.9% — that’s also from a prudency perspective, and to be able to absorb the phase-in of potential risk weight increases or capital floors.”