Nationwide ‘six month par call’ promises savings

Banks could substantially cut cost of carry when refinancing AT1s by using a “six month par call” feature introduced in a £600m Nationwide Building Society deal in September that increases issuers’ flexibility.

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Under the six month par call feature, issuers maintain the minimum five year non-call period necessary for instruments to qualify as AT1 (Additional Tier 1), but, while keeping a first call date at around five years, push back the coupon reset date to six months beyond this. The instrument is then callable at par anytime from the initial call date to the first coupon reset date six months later.

“If an issuer refinances within the six month timeframe, from the moment they have done the new issue they can give a call notice and thereby reduce the period of overlapping interest to as little as a week,” says Doncho Donchev, DCM solutions, Crédit Agricole CIB (CACIB). “So it’s a neat way to minimise the cost of carry, which in the case of AT1 can be quite substantial.”

The feature had previously been incorporated into corporate hybrids, and was taken up in the financial institutions space in March when Aegon included it on a €500m 5.625% perpetual non-call 10 Restricted Tier 1 (RT1) issue. The Dutch insurer’s issue is callable from April 2029 until October 2029, when the first coupon reset occurs.

Nationwide Building Society’s £600m (€695m) perpetual AT1 issue is callable from December 2024 until its first coupon reset in June 2025. Launched on 17 September, the AT1 attracted some £3.75bn of orders, enabling pricing to be tightened from initial price thoughts of the 6.375% area to 5.875%, equivalent to a new issue premium of around 0.125%, according to the leads.

“Success speaks for itself,” said a syndicate banker at one of the leads, “as the UK building society ended up more than six times oversubscribed and able to tighten 0.5%.”

AIB Group then became the first Eurozone bank to adopt the feature when on 2 October it sold a €500m perpetual AT1 callable from October 2024 ahead of an April 2025 first coupon reset date. The pricing was tightened from IPTs of the 5.75% area to 5.25% on the back of books of some €3.5bn, with the leads deeming the pricing flat to fair value.

“We’d already had a couple of test cases on the insurance side that went perfectly smoothly,” says Donchev, “and both of these new AT1s were highly successful, well placed, and are trading up nicely in the secondary market.

“The feature is not significantly impacting pricing,” he added, noting that the first call coming before the first reset date means investors will not face a different coupon if the call is exercised during the six months.

The structure’s minimum maturity of 5.5 years means that issuers may be paying for a six month longer maturity, but Cécile Bidet, head of DCM solutions and advisory at CACIB, notes that this is more than compensated for by the saving achieved on the cost of carry.

The adoption of the feature within the banking sector comes against the backdrop of the first wave of AT1 call dates five years after the instrument’s introduction, with issuers now seeking to optimise management of their call schedules. In March, this saw Coventry Building Society tackle the issue by launching a tender offer for an AT1 ahead of its first call and less than five years since its launch, in conjunction with a new AT1 issue.

Bidet at CACIB says the issue has come into sharper focus as issuers have sought to play it safer in refinancing upcoming calls.

“Previously, Tier 1 instruments were being refinanced six months before the call date,” she says, “but over the last two years we’ve seen refinancing being done increasingly early — more than 12 months before the call in some cases — and the cost of carry has suddenly increased materially.

“So banks have had to start thinking about ways of reducing the double cost of carry, and having a feature that allows you to do this is very interesting.”

Gark Kirk, portfolio manager at TwentyFour Asset Management, said the feature should come as a welcome development for all AT1 issuers and be adopted by more borrowers going forward.

“We believe this latest development from Nationwide is further evidence the UK regulator is assisting banks in making the refinancing of these capital notes as efficient as possible,” he said, noting it followed Coventry’s liability management initiative.

The wave of first calls in the AT1 market and questions over who may call or not call their issues has increased the focus on how often they are callable after the first call date, which can be anything from anytime to every five years. Donchev says banks who include less frequent call dates on their AT1s will find the six month par call most valuable, but that it should be attractive even if issues are callable every three months, as this feature avoids a reset to a potentially substantially lower coupon level in the event of a non-call.

Since its introduction into the banking sector, Banque Internationale à Luxembourg has used it on a €175m perpetual non-call six AT1, and La Banque Postale on its inaugural AT1. LBBW did not include such a feature in its recent debut, but a six month par call clause is included in its AT1 prospectus for potential future use.