Turnaround in outlook sparks AT1 boom

Market conditions proved exceptional through the end of the first quarter as credit markets retraced the widening they had suffered into the end of 2018, to provide ample opportunities for issuers to launch bank capital trades at pricing levels that would only have been dreamed of at the start of the year.


“Two weeks into the year, people realised that the physiognomy of the market was changing completely,” said Vincent Hoarau, head of FI syndicate at Crédit Agricole CIB. “The driver of this transformation was the turnaround in stance of central banks.

“In the year-end purge, everyone had been focused on the anticipated end of quantitative easing, but in January the Fed indicated it would pause rate hikes if necessary, while some very negative datapoints started coming out of Germany. This is when everyone started to reassess the situation and we quickly moved from ‘apocalypse now’ to ‘we can’t miss out’.”

After having prudently opened their 2019 funding programmes with defensive covered bond and senior preferred trades, banks dusted off senior non-preferred projects that had been put on the backburner while spreads were at painful levels, and increasingly took advantage of the buoyant market to launch Tier 2 and AT1 issues.

And when European AT1 issuance in dollars and euros eventually opened on 24 January, it was with a name that few market participants would have predicted in the darker days at the turn of the year: Banco Comercial Português (BCP).

After a one day roadshow, the peripheral issuer attracted EUR825m of demand to a perpetual non-call five transaction, rated Caa1/CCC+, allowing it to price a EUR400m deal at 9.25%, following initial price thoughts of the 9.5% area, and with a new issue premium of around 37.5bp.

UBS was a more typical standard-bearer when it launched a perpetual non-call five dollar issue four days later, on 28 January. UBS’s first AT1 in 144A/Reg S format, the deal proved a blow-out, attracting over $10bn of orders, enabling the Swiss bank to tighten from IPTs of the 7.625% area and price the deal at 7%, representing a new issue premium of only around 12.5bp, and size it at $2.5bn (CHF2.53bn) — the deal was the biggest AT1 in dollars or euros of the first quarter.

“After the success of the UBS transaction, everyone who was looking to come to the AT1 market made sure that they got ready to pull the trigger as soon as possible,” said Hoarau. “Bear in mind that at the end of January many issuers were moving into blackout periods, but in February and March most issuers who were supposed to tap the AT1 market this year did so, and we saw the busiest ever issuance of AT1.”

The first issuer to follow in dollars was Banco Santander, on 6 February, with a deal that ended up being wrapped up in discussions of its call policy (see AT1 calls feature for full details). Svenska Handelsbanken, ING and Crédit Agricole then boosted dollar supply with $3bn of AT1 issuance between 14 and 20 February that attracted an aggregate $16bn of orders. The Dutch bank’s $1.25bn 6.75% perpetual non-call five alone attracted some $8bn of demand, while the Swede could price its $500m perpetual non-call five flat to through fair value.

US dollar issuers could beat funding costs in euros on an after-swap basis, but the euro market was proving just as fertile for financial institutions staying closer to home. The likes of KBC, Erste, UniCredit and BBVA all entered the AT1 market from 26 February to 19 March, only paying new issue premiums of up to 12.5bp and in some cases zero. UniCredit attracted some EUR4.5bn of demand to its EUR1bn 7.5% perpetual non-call five, while KBC set a coupon low for the year of 4.75% in its EUR500m perpetual non-call five.

A catalyst for issuers to hit the market was when reset spreads narrowed towards 400bp, according to Hoarau.

“When dealers began giving strong core issuers pricing indications with headline coupons of mid-4% in perp non-call five format, as a borrower, you get the feeling that, OK, the market is superb and I can’t miss out on such an opportunity,” he said. “The tone can turn around very quickly.”

The benign market conditions also allowed issuers who had postponed deals late last year to successfully revive and satisfy their ambitions. Among this cohort were Van Lanschot and Volksbank Wien, who both withdrew from the market in October 2018 but could execute their modestly-sized AT1s in the improved conditions of late March and early April. The Dutch issuer priced a EUR100m perpetual non-call five with a coupon of 7.5% and the Austrian a EUR220m perpetual non-call five at 7.75%.

“These may be less liquid, less well established names,” said Hoarau, “but given the strength of the market backdrop, there is clearly demand for these yields from investors seeking performance and ready to face the mark to market risk.”

A debut AT1 for Italy’s Banco BPM gave this bullishness perhaps its sternest test on 11 April, when it sold a EUR300m perpetual non-call five, with mixed results. The AT1 transaction — the first from a second tier Italian bank — was only modestly oversubscribed, demand dropping from over EUR600m to EUR375m during execution with pricing tightened from IPTs of the 8.875% area to 8.75%.

Indeed, the extent to which market and economic conditions have reverted towards those seen during the excesses of the QE era — with the 10 year Bund, for example, having moved back into negative territory — have prompted a renewed reappraisal of the outlook.

“The market is becoming increasingly fragile and the direction of the market over the rest of the year is increasingly uncertain,” said Hoarau.

On the one hand, he said, economic data could improve, pointing to a stabilisation of global growth, with rates edging higher and the bull market continuing. On the other, economic data could deteriorate further, with markets vulnerable to a repeat of the second half of 2018.

In the near term, several positives point to the market going higher still, suggested Hoarau: excess liquidity remaining intact; the risk of an escalation in US/China trade tensions falling; time being bought through a Halloween Brexit; central banks across the board, and particularly in China, responding to the economic slowdown.

“And most importantly, TLTRO III is looming,” he said, “namely another round of cheap funding, with the ECB pouring cash into the system. However, in the very short term fundamentals will be monitored — economic datapoints and corporate earnings — to gauge the market’s potential.

“The buyside globally will continue to be selective, but constructive, with a stronger bias towards quality and liquidity in continental Europe, where investors will continue to drive core IG sub debt,” added Hoarau. “Meanwhile, the support and the role played by UK buyers in primary will continue to be decisive and instrumental for anything higher beta, less liquid and with sub-investment grade ratings.”