UBI AT1 debut attracts €6bn bid as stars align

A €400m AT1 debut from UBI Banca on 13 January attracted more investors than any previous bond issue from the Italian bank, as some 450 accounts placed in excess of €6bn of orders. Head of funding Giorgio Erasmi shared his insights into the bank’s strategy and his views on the market with Bank+Insurance Hybrid Capital.

Bank+Insurance Hybrid Capital (BIHC): What were your AT1 needs and why did you come to the market with your debut at this time?

Giorgio Erasmi, UBI Banca: Our RWAs are a little less than €60bn, so with the current allowance to use AT1 for 1.5% of RWAs, our total capacity is close to €900m. We decided for our first issue to use almost half of this bucket.

We have been working on this AT1 project since the first half of 2018, but unfortunately in the last 18 months we were not able to find an interesting market that could provide us with pricing at a coupon level commensurate with our conservative approach. That’s why we decided to go to the market when at the beginning of this month we saw that there was a window of opportunity to issue at a coupon that, in our view, was in the area of 6% plus or minus a certain tolerance.

BIHC: How would you explain the state of the market so far this year?

Erasmi, UBI: Firstly, at the beginning of the year asset managers need to invest their money efficiently where possible – they don’t want to wait until later in the year.

Secondly, we are facing an environment where interest rates remain subdued and there is no sign of that changing in the near term. So there is no reason for investors to wait for better opportunities, but even more incentive for them to invest now.

Thirdly, the average coupon of new issues is very low if you remain in core countries – coupons range between a negative or zero rate and, for riskier assets, 2% or 3%. To get above 4% or 5%, you need to switch to other types of risk – we issued at a level of 5.875%. Our issue therefore proved an interesting proposition for investors – obviously AT1 is a riskier instrument, but it proved an attractive level for investors on a name that we believe they perceive as a good credit.

BIHC: How did the pricing compare with your expectations?

Erasmi, UBI: Honestly, we achieved a level very close to fair value based on our observations in the period preceding the new issue. We monitored fair value based on a comparison with UniCredit’s curve, which is a very liquid curve and comparable in terms of instrument. We saw fair value in the area of a final coupon of 580bp and we ended up at 5.875%, so in line with fair value, which is always a good result.

Indeed, post-deal, it appears that we may well have been too conservative in the calculation of the fair value, because our AT1 is stabilising at a differential to UniCredit’s well below what we calculated. It is trading at a pick-up of roughly 50bp to UniCredit AT1, which is a strong result. So we are happy with the level at which we issued, but even happier about the secondary market performance.

BIHC: I imagine the level of demand helped you achieve that result – did it surprise you, the size of the order book and number of investors who were involved?

Erasmi, UBI: Requests for bonds from 450 investors represents the widest demand we have seen on any issue in the 13 year history of our group since 2007. So yes, we were indeed surprised. We were aware that we were issuing an interesting instrument that would prove attractive for investors and that demand would probably be high, but we were not imagining such a high number. And furthermore the diversification from a geographical perspective was very interesting.

BIHC: You included a six month par call feature in your issue – what is your view on this relatively recent development in bank AT1?

Erasmi, UBI: Under this option, we have the ability to call the AT1 every day from January to June 2025, subject to 15 days’ prior announcement to investors on Euroclear. This is a good feature for the issuer, in that if and when we were to substitute the issue in 2025, we would reduce the period of double-counting in terms of coupon being paid, because as soon as we were to issue a new AT1, we would call the existing one.

BIHC: You mentioned this issue is equivalent to roughly half your AT1 bucket – so investors can expect to see another AT1 from you at some point? I note that you were also quite active last year across a range of instruments.

Erasmi, UBI: In the current funding plan we are executing in this first part of the year, we had only this issue, so in the short term we are not planning to sell another AT1. UBI Banca will announce the new business plan on 17 February, where more colour on future issuance plans for different instruments will be provided.

BIHC: Will your needs change in light of CRD Article 104 allowing AT1 and Tier 2 to partially fill P2R instead of CET1?

Erasmi, UBI: This is something to be monitored and acted upon in the future, if it is possible to do so.

For the time being, we have been communicating to investors that we see 12% as an appropriate level of CET1 for a bank with the business model of UBI Banca – a typical commercial bank with low risk profile, well diversified, focused on SME customers. Our view is that this is a stable and good level of CET1.

Read our previous Q&A with UBI Banca’s Erasmi on last year’s activity here.