RBS: Improving proposition

Royal Bank of Scotland launched its inaugural Additional Tier 1 transaction on 5 August, a $3.15bn two-tranche deal. Afterwards, Scott Forrest, head of capital strategy and debt capital markets, RBS, spoke to Bank+Insurance Hybrid Capital about how the launch of the issue fitted into the UK bank’s strategy and how investors bought into its improving credit story.

What was the rationale for RBS issuing its inaugural AT1 transaction?

We wanted to issue CRD IV-compliant Additional Tier 1 to strengthen our capital base and had given an undertaking to our regulator that we would do this in 2015. It’s really there to support the transition of our capital base from old-style legacy Tier 1 into new-style CRD IV-compliant AT1.

Why did you choose to issue in US dollars?

We are cognisant of all markets and all currencies. Issuing in dollars made commercial sense for us because it is the biggest, deepest and most liquid market for AT1. So there was a pricing benefit for us to access dollars over other currencies.

What influenced the maturity structure of the AT1?

We view RBS as an improving credit story and we therefore wanted to reflect this in our choice of maturity. When we engaged with investors we recognised that there would be an opportunity to upsize our transaction to £2bn equivalent if we supplemented a perp non-call five structure [sized at $2bn] with a perp non-call 10 structure [$1.15bn].

Were you satisfied with the result?

We were very happy with the overwhelming demand from investors for the instrument. We had an extremely strong order book, with significant orders from key real money accounts coming in.

We had signalled to the market for a considerable period of time that we would be looking to issue AT1 at some point in 2015. August isn’t necessarily a traditional time when you would look to come to market with AT1 or in our case an inaugural transaction, but considering that there was potential uncertainty in the markets ahead, we saw this as a window which was open to us, and it therefore made a lot of sense to get our £2bn requirement done in one go.

There had also been volatility in the market earlier in the year. Had you been ready to go earlier?

Yes, we had been in a position to proceed on our side and back in March we looked at the possibilities in the market, but there were some slight wobbles. After that, announcements relating to our FX settlements were expected so we opted to step back and reassess conditions after our interim results.

What feedback did you get from investors on the roadshow? Were there any particular things that people were focusing on?

We had three teams, doing two days in London and with two teams in the US — one on the East Coast and one on the West Coast — so we could fully engage with as many investors as possible.

From our perspective, we have got very much an improving credit story. You just need to look at our CET1 position: two years ago we were at 8.6%; at the half year we were at 12.3%. We are quite far down the road in relation to the disposal and deconsolidation from a regulatory perspective of the US subsidiary, Citizens Financial Group, and when it completes that will add about another 3% to our CET1.

Investors, I believe, readily got onside in terms of this improving credit story. The one ongoing theme is the previous conduct and litigation issues, and we were still waiting for some of those to settle. So whilst we have shown great improvement in the underlying CET1 position, there may still be a few bumps on the road to come.

You mentioned that a consideration in the timing was potential uncertainty going into the autumn – was the September Fed meeting related to that?

If we look at the sort of instability there has been in the market, immediately after our deal there was a short window of issuance in the early part of August and then after that it was shut. So we just saw that there was a small window of opportunity there to come in — we had a shortened roadshow, doing it in two days, whereas normally for an inaugural AT1 we would have probably have looked to do three days. We decided to launch on an accelerated timetable so we could be in and out of the market quickly.

Did the way the market has been affect the kind of premium and price you had to pay? How did your positioning relative to peers work out?

Throughout the build-up to the transaction we looked at what our underlying building blocks were in terms of pricing, and probably the closest comparable instrument for us would be Barclays. At the point of pricing, we printed close to Barclays, and then in subsequent aftermarket trading, through Barclays. So that’s a great position for our AT1 given the credit differential — but it is not necessarily something that is reflected in our Tier 2 or our senior debt instruments, which are still trading wider. So from a fundamentals point of view, it was a successful transaction.

At the same time as being pleased with the way the deal went and the underlying pricing, since we are an improving credit story we would hope that, all things being equal, the next transactions that we bring would be tighter.

What might you have planned looking ahead?

For AT1 we are done for the year. Looking ahead to the end of this year and into next year, our focus will be on senior TLAC instruments. To my mind there still isn’t sufficient clarity on the underlying terms and conditions of TLAC, of how that will be positioned internally, so we still require further guidance on those points, and with all these things the devil is in the detail. On TLAC we have seen a range there of 16%-20%: it may be 16%-18% initially and then increasing in subsequent years — we’ll see where that comes out at the time of the G20. But based on the earlier guidance of 16%-20%, the upper end of that would put our sort of TLAC senior issuance somewhere in the region of Eu3bn-Eu5bn per annum.

Was that something which investors focused on?

Yes, investors always want to get a little bit of a sense of just what your issuance plans are and when you are next going to be coming to market — i.e. is this a deal that I participate in today or am I better off waiting for the next transaction to come along? We were pretty open with them in terms of what our issuance requirements would be in AT1, Tier 2 and senior.

In AT1 we have got a total of £4bn-£5bn to do. We have now done £2bn of that and we would look to do the balance over the next couple of years — and bear in mind that we have got this story here of improving credit quality, such that it should become cheaper for us the longer that we wait.