Credit Suisse hits pre-summer window with $2bn AT1

Credit Suisse took advantage of a possibly final pre-summer issuance window to sell a $2bn (EUR1.7bn) Additional Tier 1 (AT1) on 9 July, but demonstrated the underlying unreliable nature of the market by going out with initial price thoughts incorporating a concession to fair value of as much as 100bp.

Credit Suisse from them

Weakness and widening in the face of episodes of volatility playing out against the backdrop of the anticipated end of QE in Europe had characterised the whole of the first half of the year, but conditions had become particularly febrile from 29 May, when fears over the agenda of the prospective Italian populist coalition government sparked panic, including the biggest one-day move in two year Italian yields since 1992.

“The market has been so volatile ever since,” said Neel Shah, financial credit desk analyst at Crédit Agricole CIB. “The BTP-Bund intraday spread differential has moved plus or minus 20bp on average over the past two months, and at the most extreme 90bp intraday.

“Most days felt the market was taking a positive step forwards in the morning but closing weaker by the end of the day, driven by political headlines from the new Italian coalition government.”

A consequence of the prevailing volatility was that no European AT1 or Tier 2 benchmarks hit the market in the following three weeks, until Danske Bank on 20 June launched a $750m perpetual non-call seven AT1.

The transaction was executed after the bank had encountered encouraging demand on a $1.75bn debut dollar senior non-preferred issue two weeks earlier (see Danish feature), and it was able to attract over $2bn of orders from around 170 investors to its AT1 amid a stable market window. Following IPTs of the 7.125% area, a $750m issue — the maximum targeted size — was priced at 7%, equivalent to a new issue premium of some 45bp-50bp.

“It was surprising to see these types of concessions from strong issuers, but it is evidence of the state of more or less the entire sub market these days and likely to set a precedent for other issuers in this asset class looking at the market,” said George Kalbin, director, FI syndicate at Crédit Agricole CIB.

“Investors have remained cautious on AT1s and Tier 2s, with AT1 concerns being driven by the extension risk the instruments face, causing the market to look for a new pricing equilibrium.”

But, coming on a day when a dozen other deals hit the primary market, including hybrids from CNP Assurances (see separate article) and VW, the new issuance was taken as an encouraging sign, and further supply followed the next day, with Caixa Geral de Depósitos, for example, issuing a EUR500m Tier 2 (see separate article).

“Investors need a very high degree of conviction to participate in new issues,” said Kalbin, “but the good news is that cash is abundant and primary market works well when issuers demonstrate a consensual approach and relatively friendly attitude towards pricing.”

The AT1 sector nevertheless continued to underperform, with Danske’s US dollar issue trading at a cash price of 98 in early July, while a bellwether such as a $2.35bn HSBC 6.25% perpetual non-call five sold in March was trading at a similar level, having fallen below par in the preceding couple of weeks.

However, an improvement in tone and secondary spreads in the first week of July capped by encouraging non-farm payrolls on Friday, 6 July teed up an issuance window that Credit Suisse chose to take advantage of the following Monday.

The Swiss bank went out with initial price thoughts of the 7.875% area for its perpetual non-call five AT1 and ultimately priced a $2bn deal at 7.5% on the back of a reported $11bn of demand.

“It’s relatively attractive versus the existing AT1s that were coming in the first quarter and the end of last year as well,” said a market participant. “The resets on AT1s have come wider and wider this year as the market has gotten weaker and weaker, and this one’s coming rather wide relative to the recent deals, too, so we think it will reprice the secondary curves for those AT1s wider and this will be the new benchmark in terms of where investors feel comfortable.”

Kalbin at CACIB meanwhile noted that the summer season was beginning to set in.

“Not only in the AT1 market, but also across the sub and senior space, there is a lot more focus on a pragmatic approach towards pricing in order to minimise execution risks,” he added.

“The run-up to August is probably going to be characterised by covered bonds and maybe some senior unsecured, but I doubt we’re going to see anything extravagant hitting the screens unless there’s a very good market window.”