IFR 02.29.2020

„ FRONT STORY FINANCIAL

AT1s suffer but hopes persist for product

Sell-off lifts yields away from record lows

Some investors spy buying opportunity

Market participants remain upbeat on the

longer-term prospects for the Additional

Tier 1 market despite dramatic

underperformance last week, which could

provide buying opportunities.

With growing coronavirus fears sparking

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issuer last week, an ING GROEP AT1 that

provides a perfect case study of the market’s

deterioration.

The transaction was postponed on

February 19, when ING was on course to

price a US$1bn deal inside 4.625% upon a

US$11bn order book. Last Monday, it had to

settle for a US$750m deal at 4.875%, as

books closed at US$3bn.

Other potential issuers have stood down

and are waiting to see how the market

develops, bankers said. All eyes have turned

to the secondary market, where the riskiest

form of bank debt has led the

underperformance.

IN REVERSE

The sell-off has reversed a run lasting several

months for the asset class that pushed AT1

yields to record lows in recent weeks.

Italian AT1s were the hardest hit last

week following a coronavirus outbreak in

northern Italy.

Both tranches of a €1.5bn AT1 offering priced

at par by INTESA SANPAOLO on February 20 were

bid at a cash price of around 92.00 last Friday.

“It was clearly good timing for the

Italians, getting their deals done by last

week,” said a DCM banker.

A €1.25bn 3.875% perpetual non-call 2027

AT1 sold on February 12 by UNICREDIT –

which was already hovering around 98 after

some market participants said it was too

aggressively priced – had fallen to 88.25. Its

yield had risen to 5.974%.

The impact has not been limited to Italy,

though. A US$1.25bn 6% perp non-call 2025

from DEUTSCHE BANK, which had traded up to

101.40 in mid-February after pulling in more

than US$14bn of demand, was bid at 91.80

last Thursday.

The average yield of the Bank of America

CoCo index has risen from 3.459% on

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TIMEûLOWûnûTOû

4.068%.

Charlene Malik, portfolio manager at

TwentyFour Asset Management, said that in

periods of stress, price moves are sometimes

exacerbated in a vacuum of liquidity.

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lNANCIALSûAREûHIGHûCOMPAREDûWITHûLEVELSû

observed earlier this year.

BUYING OPPORTUNITIES?

The implications for the AT1 market are

tied in to the wider question of whether

last week was the start of a big correction.

“From a market standpoint, we would

still advocate caution,” said Malik.

“Naturally, there will be buying

opportunities created, but we feel

investors are better rewarded to remain

cautious in the short term until there is

further clarity.”

Other market participants remain

upbeat on the long-term prospects for the

AT1 product, citing potential central bank

intervention.

“The effects of the virus are putting

pressure on some companies due to demand

and supply shock, and banks may end up

experiencing some asset quality issues in

the near future,” said Carlos Suarez Duarte,

global credit analyst at Allianz Global

Investors.

“However, we expect central banks and

governments to provide monetary support

ANDûPOTENTIALLYûlSCALûSUPPORTû!SûAûRESULTû

the current increase in AT1 yields could

provide some attractive entry opportunities

for investors with long-term horizons.”

Michael Hunseler, head of credit portfolio

management at Assenagon Asset

Management, said the price action seems

more muted than past AT1 sell-offs.

“It is probably a combination of

decreasing rates and a weakening economy

that will translate in lower margins and

higher provisions that puts pressure on

bank stocks and CoCos,” he said.

“Nevertheless, we think banks can deal

with this. In addition, a substantial amount

of CoCos will be callable over the next six to

12 months, so that should help the market.”

MOMENTUM WANTED

The market will need to see a more

prolonged stabilisation before new AT1s can

be launched, bankers said.

Other issuers can glean little from a

US$2.82bn Bank of China AT1 last

Wednesday, as the deal was supported by

anchor orders from domestic accounts.

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deal if recent deals are trading at 97 or below,

so you want to see them back up to 99 or

above,” said a second DCM banker. “You

want to see momentum in the market.”

Issuers are generally well positioned for a

temporary market closure, with many

HAVINGûALREADYûRElNANCEDûûCALLS

Tom Revell

International Financing Review February 29 2020 25

BONDS

SSAR 27 Corporates 30 FIG 33 High-Yield 34 Structured Finance 37

“It was clearly good timing for

the Italians, getting their deals

done by last week”

Source: Refinitiv Eikon

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02/01/2009/01/2016/01/2023/01/2030/01/2006/02/2013/02/2020/02/2027/02/20

AT1 YIELDS REVERSE, HIT 2020 HIGH

BANK OF AMERICA COCO INDEX

BID YIELD

“In AT1, it’s always difficult to

do the next deal if recent deals

are trading at 97 or below”

6 IFR Bonds 2322 p 25 - 43 .indd 25 28 / 02 / 2020 19 : 15 : 30