BBVA Mexico makes successful Tier 2 shift

BBVA Mexico switched from its typical 15 year non-call 10 structure to a 10 non-call five for its latest Tier 2 issue on Wednesday, a $1bn (MXN20bn, €967m) 144A/Reg S transaction that attracted a peak $5.4bn of orders, allowing the bank to achieve its tightest re-offer spread since 2018.

Following initial price thoughts of the very low 8s area, the benchmark — expected ratings Baa3/BB Moody’s/Fitch) — was priced at 7.625%, some 50bp inside the IPTs. The book experienced only modest attrition, declining from the $5.4bn peak to $4.9bn, and maintained its quality, according to Gordon Kingsley, MD, Head of LatAm DCM at active joint bookrunner Crédit Agricole CIB, allowing for the ultimate sizing of $1bn. The pricing, equivalent to US Treasuries plus 337.5bp, represented a minimal new issue concession, of around 7.5bp.

BBVA Mexico’s first US dollar transaction of the year, the Tier 2 deal followed a 15 non-call 10 last year and, in September, a five year senior unsecured trade that provided a reference point for relative value analysis on the new 10 non-call 5 issue.

The Mexican bank had four series of 15 non-call 10 Tier 2 securities outstanding and the shift in structure offered diversification in tenor for the targeted investors, while fitting into BBVA Mexico’s curve, which has Tier 2 call dates in 2028, 2029, 2033 and 2034.

Jon Gray, MD, DCM Americas at Crédit Agricole CIB noted that, for Mexican banks, Tier 2 represents the most cost effective way of satisfying TLAC requirements.

“With this transaction, BBVA Mexico is maintaining its comfortable Tier 2 level, allowing the institution to keep growing its portfolio without capital constraints,” he said.

“The new issue,” added Doncho Donchev, executive director, DCM Solutions at Crédit Agricole CIB, “puts BBVA Mexico in a comfortable position to comply with TLAC requirements that will become fully phased-in at year-end 2025.”

BBVA Mexico’s TLAC ratio was 18.7% as of Q3 2024, versus its phased-in TLAC requirement of 16.875% as of year-end 2024 and expected final TLAC requirement of around 18.5%.

The BBVA group follows a Multiple Point of Entry resolution strategy, meaning that in the case of failure, each subsidiary and the Spanish/EU operations will be subject to separate resolution measures.

It is in this context that BBVA Mexico has been regularly issuing Tier 2 bonds to external investors since 2014. At the same time, the Tier 2 transaction is recognized for consolidated capital at group level, subject to certain haircuts.