Spanish rise to the challenge

From the Banco Popular crisis to a Catalan declaration of independence, Spanish banks have had to navigate a tough few months. But not only have they survived, they have thrived, achieving pricing records while launching debuts and inaugurating new senior non-preferred legislation. Neil Day reports.

Mulhacen Manel Flickr

Just a month after Banco Popular sub debt had been wiped out, CaixaBank on 5 July reopened the sector with a EUR1bn Tier 2 trade and the next day Bankia sold its inaugural Additional Tier 1 issue, a EUR750m deal that achieved record pricing on the back of as much as EUR3.5bn of demand.

The new issues were launched into a market where spreads on Spanish capital instruments and sub debt in general had ultimately proven resilient in the face of the effective write-down of Banco Popular AT1 and Tier 2 on 7 June after the institution was deemed to be failing or likely to fail by European financial authorities.

Fernando Cuesta, head of long term funding and treasury at Bankia, said it was good to see the receptiveness of the market to its debut, which — at 6% — had the lowest ever coupon for a Spanish AT1 at the time of issuance.

“The market is in a different mood to the first quarter of 2016 when there was all the noise that resulted in historic wides for everyone,” he said. “Right now, the market is much more prepared and able to differentiate something idiosyncratic, while if they like a credit, they are able to buy.

“And considering that losses in both AT1 and Tier 2 seem to be similar in case of failure, a lot of investors started to see more value in AT1 and maybe less in Tier 2, and we probably benefited from that,” he added. “This movement was already reflected in secondaries and investors wanted the opportunity to take positions in size in primary, and they got that with our transaction.”

Bankia had been working towards its first AT1 since early 2016, but, alongside the usual preparations, was held up by a technical issue relating to the conversion price floor under the instrument’s equity conversion loss absorption mechanism. Bankia resolved this by performing a 4:1 reverse share split and reduction in the nominal value of ordinary shares, but this had to be approved at the bank’s general shareholder meeting, which took place on 24 March this year.

By the time this measure was effective, Bankia’s interest in BMN had emerged and the bank decided to wait until the terms were formalised before launching the AT1, given the impact the absorption of Bankia’s smaller peer via merger would have on key metrics such as CET1 ratio and MDA. The bank had nevertheless been lining up its documentation, putting it in a position to issue as soon as this final issue had been resolved, which happened on 27 June.

“That was released a week and a half before we priced the transaction,” said Cuesta, “and we considered that there was still time to execute the transaction before we entered into blackout. And then we were pretty quick, to be honest.”

Bankia held a two-team, two-day roadshow on 4 and 5 July, then on 6 July opened books for a EUR750m no-grow perpetual non-call five AT1 with initial talk of the 6.5% area. Cuesta said this level reflected feedback from investors, who had put in some EUR1.7bn of indications of interest — suggesting demand could prove to be of a similar magnitude to that Bankia experienced on a EUR500m 10 year non-call five Tier 2 on 13 May that was almost 10 times oversubscribed.

“In reality, demand grew to close to EUR3.5bn by around 10.30 UK time,” he said. “As we were already four to five times oversubscribed but could not increase the size, we decided to move in terms of price guidance.

“We felt that anything below 6% would not be reasonable, but that — considering the feedback from investors and the amount of demand — 6%-6.125% was something the book could live with, and in fact it was the case. Some investors left the book after the movement, as is usually the case, and then the final book size was EUR2.5bn, and that was what we had to allocate for the EUR750m at the 6% level.”

Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, said the initial talk was in line with his expectations, given that a EUR1bn 6.75% perpetual non-call seven debut CaixaBank AT1 launched on 1 June was trading at a yield-to-call of 5.85% and i-spread of 530bp, implying fair value of 5.5% for a CaixaBank non-call five.

“So the pricing of Bankia at 6% implied only 50bp for the credit spread differential and new issue premium combined,” he added, noting that Bankia was trading 40bp wide of CaixaBank in Tier 2 and 60bp inside Sabadell. “Size matters in these markets and the cap at EUR750m certainly delivered traction.

“Judging by the execution and momentum during bookbuilding, Popular doesn’t appear to have slowed them down or forced them to pay a higher premium.”


Another banker said Bankia’s pricing was very competitive bearing in mind that Sabadell AT1 had underperformed in the wake of Popular’s collapse – although Sabadell’s EUR750m 6.5% perpetual non-call five AT1 debut, launched on 5 May, recovered from the high 6s when Bankia hit the market to trade in the low 6s going into the end of July.

Cuesta meanwhile noted that Bankia’s successful execution was achieved in spite of unhelpful underlying markets.

“It probably looks easy from the outside,” he said, “but actually during bookbuilding we had this underwhelming French OAT auction and then there were the ECB governing council minutes, so it was one of these days in which the world was changing its view on interest rates and QE, which particularly affected the medium to long term deals and made pricing a fixed rate transaction challenging.

“In that sense, having a book of approaching EUR4bn probably helped when some investors reduced orders, and the result was pretty encouraging for us. We had more than 125 investors in the final EUR2.5bn book.”

The UK and Ireland were allocated 53%, France 19%, Nordics 7%, Switzerland 6%, southern Europe excluding Spain 6%, the Benelux 6%, Germany 2%, and others 1%. Cuesta noted that the UK component of the early EUR3.5bn book was higher, but fell when pricing was tightened, with France and other areas increasing their share. Asset managers were allocated 70%, hedge funds 21%, private banks 7%, and insurance companies 2%.

The transaction has a 5.125% CET1 trigger. It is rated B+ by S&P.

Bankia’s debut filled roughly half its 1.5% AT1 bucket, of around EUR1.4bn, with the bank potentially returning with a further benchmark in 2018 or 2019 to fill the remainder, according to Cuesta. Its 2% Tier 2 bucket had been filled ahead of the BMN merger, but it now has 0.15% requirement, which he said is more likely to be met with a private placement.

CaixaBank reopens Spain in style

Bankia’s strong result was in line with that achieved a day earlier by CaixaBank when it issued a EUR1bn 2.75% 11 year non-call six Tier 2 flat to its secondaries in the first Spanish sub debt issue since Popular’s resolution.

Following initial price thoughts of the 260bp over mid-swaps area, guidance was set at the mid-swaps plus 240bp area (plus or minus 5bp), before the deal was re-offered at 235bp over — 100bp inside where CaixaBank had priced a 10 non-call five Tier 2 in February. That was quoted at around 225bp over when the new issue was launched, implying a new issue premium of zero or close to zero, assuming around 10bp for the curve extension from February 2022 to July 2023.

The tight pricing was achieved on the back of around EUR2.4bn of demand good at the re-offer level, comprising some 220 accounts, with little price sensitivity in the order book, according to Hoarau at CACIB, which was a bookrunner on the deal.

“CaixaBank’s result shows further evidence of very strong technical support and market conditions driven by the level of liquidity rather than fundamentals,” he said. “The imbalance in supply and demand and redemption dynamic is intact and remains in the issuer’s favour.”

“The name is meanwhile clearly very well established,” he added, “and the pick-up it offered versus peers Santander and BBVA was clearly appreciated.”

Hoarau noted that the issuer’s regular presence had done it no harm in terms of pricing, and the Spanish bank highlighted that the new issue made it the largest European issuer of institutional regulatory capital debt in the euro market in 2017, with EUR5.5bn of issuance, at the same time that it was able to achieve its maturity and cost targets.

“The cost of the new issue is down 1% in terms of spread against mid-swaps compared to CaixaBank’s issue in February, which was of a shorter term, demonstrating the market credibility established by the CaixaBank brand and its acknowledged performance over the year,” the bank said.

The deal had tightened to around 220bp over going into the end of July, without having at any point traded wide of re-offer, which Hoarau said vindicated the pricing and sizing, and demonstrated the quality of placement. The outperformance was more pronounced post-summer, with the recent Tier 2 trading in the context of 190bp despite the negative noise surrounding the Catalonia situation in October (see below for more).

CaixaBank web

BBVA then on 30 August attracted some EUR5bn of demand from over 300 accounts when it issued the first senior non-preferred benchmark under Spain’s new legislation.

Banco Santander — facing the most significant needs in Spain for such an instrument — had at the start of the year pre-empted the legislative move by creating a contractual forerunner and debuting this with a EUR1.5bn five year deal on 26 January. However, its compatriots waited for legislation to be in place, and a law of 23 June brought the new asset class into being.

BBVA’s EUR1.5bn five year transaction was priced at 70bp over mid-swaps following initial price thoughts of the 85bp area, with the leads putting the ultimate pricing at flat to through fair value.

BBVA deemed the outcome a success, noting that the spread was the lowest achieved by any senior non-preferred benchmark at the time of pricing.

Independent of independence

While the Popular crisis may have receded, a new one was brewing, with the Catalan government having in June called for an independence referendum in October.

Through September political tensions mounted, with the referendum deemed illegal by the Spanish constitutional court on 7 September, ballot boxes seized by the police on 15 September, and Catalan government ministries entered by police searching for evidence on 20 September, sparking an increase in protests — and counter-protest.

But despite an initial negative reaction to the developments — perhaps after being lulled into a false sense of security by key “populist” electoral defeats in the first half of the year — market participants soon learned to live with the renewed political agitation, allowing Spanish issuers to tap the market.

Santander, for example, on 26 September sold a EUR1bn perpetual non-call six AT1 at 5.25% — the lowest ever coupon for a Spanish AT1. By way of comparison, In April it had sold a perpetual non-call five at 6.75%.

According to joint bookrunner Santander, “the issuer seized the opportunity” against a constructive market backdrop and following a particularly busy week in the primary market. The deal attracted some EUR2bn of demand at the book’s peak and over EUR1.7bn at re-offer, with more than 180 accounts participating, “reflecting a high degree of interest from investors in adding risk to their portfolios”.

The pricing of 5.25% followed initial price thoughts of low to mid-5%, and compared with fair value of the 5% area cited by the leads.


Spanish credits were not immune from developments, particularly in early October when an ambiguous independence statement was made and clarity then sought by the Spanish government, with the regional parliament ultimately declaring independence. Names such as CaixaBank saw their AT1 fall as much as a point on 4 October, for example, with “cracks in sentiment” cited.

By the beginning of November, Spanish AT1 was back at new highs, alongside the rest of the market. CaixaBank 6.75% AT1s had fallen from a high of 110 at the end of July to as low as 105.5, but recovered to trade higher, at 111, while non-Catalan credits experienced a more muted move in both directions, BBVA 6.75% AT1, for example, fell from 107 to 105 — in line with a wider summer sell-off in the asset class — then rallied back higher to 108.5.

“Obviously there was some weakness and some volatility around the Catalan referendum,” said the credit trader, “but I guess at each point the market became more sanguine about it, and by the time they actually declared their independence, the market just continued to rally and we were already above the levels that we’d seen previously anyway.”

Indeed BBVA was on 8 November able to attract $7bn of demand to a $1bn perpetual non-call 10 AT1 and price it at the lowest ever coupon, 6.125%, for such an issue from southern Europe. (See news section for further details.)

And Banco de Sabadell two days later raised EUR400m of Additional Tier 1 capital via a 6.125% perpetual non-call five deal in a club-style private placement, akin to what fellow peripherals Popular and UniCredit had done previously. Following a EUR750m 6.5% perpetual non-call five AT1 debut in May, the new transaction fully filled the bank’s AT1 bucket.

The financial institutions closest to Catalan developments have meanwhile taken measures to insulate themselves from the crisis, with CaixaBank and Sabadell, for example, moving to relocate their legal headquarters outside the region in early October.

At the time of going to press, the situation remained fluid and tense, with ejected leaders of the Catalan government facing charges for rebellion after an independence declaration by the region’s parliament.

Around the time a declaration of independence was emerging, Moody’s both noted the relocations and said that potential disruptions associated with independence would likely have a relatively limited effect. But it warned of an escalation of the crisis.

“More broadly, there is a risk that Catalan independence could engender political turmoil in other parts of Spain, or indeed elsewhere in the European Union given recent political trends,” it said. “For now, we believe this risk is very small.

“Should this assessment change, however, it could have negative credit implications for a much broader range of issuers.”

This feature updates and expands upon an earlier article.

Main image: Mulhacén; Photo: Manel/Flickr