Inaugural Commerzbank $1bn AT1 worth the wait

Commerzbank launched its long-awaited debut AT1 on 2 July and attracted some $11bn of orders to the $1bn perpetual non-call April 2025 deal, with regulatory developments, the issuer’s credit story and market conditions combining serendipitously.

DreBa Zertifikatsvergabe mi Hr. Herrlein

Many G-SIBs and D-SIBs moved quickly to fill their buckets once AT1 regulations were finalised in late 2013 — such as compatriot Deutsche Bank in 2014 — but coming into 2019, Commerzbank, along with France’s BPCE, was one of the last notable big EU bank absentees from the asset class. Doncho Donchev, DCM solutions, Crédit Agricole CIB, said that Commerzbank’s sizeable stock of grandfathered hybrid Tier 1 instruments, which were cost efficient and treated as AT1 on a transitional basis, obviated the need for the German lender to come to market.

“By having the luxury of not having to issue, they sidestepped the various complexities and issues that cropped up as the market was developing, such as distance to trigger, P2, MDA and ADI concerns,” he said. “Instead, they spent that time focusing on cleaning up their balance sheet and becoming the stable bank they are today.”

In addition to the declining regulatory capital value of the legacy instruments, contributing to Commerzbank’s decision to finally enter the AT1 market was the European Banking Authority’s change last year to how CET1 counts towards covering Pillar 2 Guidance (P2G) and any AT1/Tier 2 shortfall. Whereas previously the same CET1 could be counted towards covering P2G and any AT1/Tier 2 shortfall, from next year they will have to be covered separately (as recently confirmed by the ECB), incentivising banks to remove any shortfall rather than face an effective higher CET1 requirement.

This was understood to be one of the rationales for the Commerzbank AT1 trade, as well as the issuer’s intention to generally optimise its capital structure, support its credit rating metrics, and further strengthen key financial metrics, including leverage ratio and MREL.

While the above regulatory development contributed to Commerzbank’s issuance rationale, another made its offering a more attractive proposition for investors. Under CRR2, which came into force on 27 June, the calculation for available distributable items (ADIs) has changed such that Commerzbank’s ADIs increase from some EUR1bn to more than EUR20bn. Furthermore, the AT1 issuance itself increases the distance to MDA — ultimately by more than 50bp — an additional factor working in favour of investors.

With the dollar market offering significant cost-savings versus the euro market for AT1, Commerzbank announced the mandate for its debut at the end of June and embarked upon a three-team roadshow in Europe and Asia for the Reg S deal, which has temporary write-down and a 5.125% CET1 trigger. The issuer had previously targeted the Asian market on more than one occasion, with Singapore dollar Tier 2 issuances, for example.

Meanwhile, the offering was the first benchmark AT1 from Germany since 2014.

“This confluence of circumstances — the bank’s requirements, the market context and its choice of currency and target investor bases — made it an ideal time for Commerzbank to come to market with its inaugural AT1,” said Donchev (pictured). “And the outcome was highly successful.”

Doncho Donchev3

On 2 July, Commerzbank’s leads went out with initial price thoughts of 7.5%-7.75% for the Ba2/BB (Moody’s/S&P) dollar benchmark perpetual non-call April 2025 transaction. Syndicate bankers said the IPTs were based on a diverse range of investor feedback, with Commerzbank having no obvious comparables, although issues from BBVA, Danske and SG were among a variety cited by market participants, one of whom put fair value at 6.875%.

Guidance was set at the 7.125% area, plus or minus 0.125%, will price in range, when books were above $8.5bn. The deal ultimately attracted some $11bn of demand, enabling pricing at 7% and a $1bn (EUR883m) size.

“The marketing and pricing approach was extremely consensual, and I presume also designed around the price discovery element implied by the nature of the transaction,” said Vincent Hoarau, head of FI syndicate at Crédit Agricole CIB. “And it paid off with a highly successful transaction.

“Meanwhile, nothing in the process can lead to the conclusion that the issuer may have been generous. The market has come a long way and the compression throughout H1 has been impressive. 7% is a very competitive outcome in terms of funding cost for a $1bn trade.”

Based on RWAs of EUR185bn, Commerzbank’s AT1 capacity was put at EUR2.8bn, meaning the issuer has room for almost EUR2bn of further issuance. However, this is balanced by the existing legacy AT1 stock, which puts the bank in the driving seat in terms of follow-on AT1 supply.