AT1 sector starts 2018 on
a high
Bumper book for RBI despite minimal concession
Greater numbers of investors are chasing
fewer Additional Tier 1 bonds in primary,
putting the sector on a rock-solid footing
even as signs of weakness emerge in the
high-yield market.
RAIFFEISEN BANK INTERNATIONAL reopened the
sector in style last Wednesday, selling a
tightly-priced €500m 4.50% perpetual NC7.5
(Ba3) at par on books more than eight times
subscribed from 334 accounts. It was trading
up at 100.80 on Friday.
The response highlighted the depth of
demand for AT1, the most subordinated
layer of bank debt, enabling RBI to claim the
second-lowest coupon for a euro AT1 despite
its chequered history.
A phenomenal rally has seen the Bank of
America Merrill Lynch CoCo index move
from 6.14% to around 4.40% over the past 12
months, though there is still room for
further compression - RBI priced around
300bp wide of its Tier 2 debt, for example.
h-ANYûlXEDûINVESTORSûWHOûAREûNOWûMOREû
comfortable with European bank
fundamentals have woken up to the fact it’s
one of the only places left with a bit of
value,” said Ciaran Callaghan, head of
lNANCIALSûCREDITûRESEARCHûATû!MUNDIû!SSETû
Management.
Dealers are also reporting increased
demand from the US for euro European AT1s,
given the richness of the US dollar market.
“There is more money chasing new deals,
and RBI was a prime example,” Callaghan
said. “It feels as if the market is still under-
invested in the asset class, with more cash
on the sidelines waiting to get involved at
some point this year.”
Citigroup forecasts just €13bn of euro-
denominated AT1 issuance in 2018. BELFIUS
!!
!
ûWILLûBEûTHEûlRSTûTOûFOLLOWû2") û
having already announced a debut €500m
no-grow perpetual NC2025.
ONE IN, ONE OUT?
The stability of the AT1 market contrasts
with the high-yield sector, where valuations
have backed up in recent months and single
names such as Altice are under pressure.
“You’re seeing a complete decoupling,”
said Barry Donlon, head of capital solutions
at UBS, a joint bookrunner on RBI. “There is
some negative sentiment across the high-
yield market and in AT1 there is absolute
bullishness. It’s a really positive thing.”
High-yield funds have been major AT1
buyers in the past, even though the large HY
borrowers have little in common with RBI,
except on a ratings basis.
High-yield investors have by no means
disappeared, though one banker said some
are losing interest, with one hedge fund
manager anecdotally “removing the AT1/HY
indicator from his dashboard”.
On the other hand, AT1 rating upgrades
have been a major factor attracting a
broader base of investors. Moody’s, for
example, upgraded Erste Group Bank’s AT1
debt to BBB- from BB+ in October.
“So, from a comps perspective,
fundamentally, we’ve moved away; and then
from a technical market perspective,
because you’re accessing a larger IG investor
base instead of relying on the HY base, the
correlation isn’t there,” said Donlon.
But Amundi’s Callaghan suggested any
proper repricing in the HY market could
trigger some volatility in AT1 later in the
year, given their off-benchmark status.
“It’s one of the main headwinds, along
with extension risks,” he said.BLINDSIDED?
While a growing buyer base is clearly a boon
for banks that still need to sell AT1, the grab
for paper is arguably fostering complacency
among investors.
Despite improvements in RBI’s asset quality
and capitalisation, it is regarded as one of the
sector’s weaker credits, with sizeable exposure
to Eastern Europe, for example.
It has also failed to call Tier 1 bonds in the
past, though demand is such that investors
did not unduly focus on the new issue’s
lower back-end spread.
4HEûCOUPONûWOULDûRESETûTOûlVE
YEARûMID
swaps plus the initial margin of 387.7bp if RBI
failed to call the bond. That compared with
the 595.4bp reset spread on its inaugural
€650m 6.125% NC5.4, which - unusually -
tightened 40bp on the back of the new deal.
A second investor warned the new issue
could underperform in a weakening market.
“For an issuer that was under some pressure
to improve capital ratios not too long ago, I
lNDûITûSTRIKINGûTHATûTHEûLASTûBASISûPOINTûOFûNEW
issue premium gets squeezed out,” he said.
Deutsche Bank, HSBC, Morgan Stanley, Societe
Generale and Raiffeisen Bank International were
bookrunners for RBI, alongside UBS. Bank of
America Merrill Lynch, "ELlUSû"ANK, Citigroup, JP
Morgan, Nomura and UBS are bookrunners for
"ELlUS
Alice GledhillWEEK IN NUMBERS
€7.109bn
THE AMOUNT THE ECB BOUGHT
THROUGH ITS PSPP IN TRADES SETTLED
IN THE WEEK UP TO JANUARY 12 AS THE
CENTRAL BANK HALVES ITS MONTHLY
TOTAL BOND PURCHASES€4.1bn
THE BOOK ON RBI’S PERPETUAL
NON-CALL 2025s, THE FIRST AT1
OFFERING OF THE YEAR. IT PRICED 50bp
INSIDE INITIAL LEVELS, AT 4.50%94bp
THE AVERAGE SPREAD OVER
TREASURIES FOR US DOLLAR
INVESTMENT-GRADE CORPORATE
BONDS, ACCORDING TO ICE BAML,
A POST-CRISIS LOW92.375
THE BID PRICE ON ALTICE’S FEBRUARY
2025s AS THE COMPANY’S BONDS SLIDE
AGAIN AFTER S&P PUT THE TELCO’S B+
RATING ON NEGATIVE WATCH€1.38bn
THE AMOUNT THE ECB BOUGHT
THROUGH ITS CSPP IN TRADES SETTLED
IN THE WEEK UP TO JANUARY 12
In total, it has bought €133.285bn–10–505101520€bnDec 1 Dec 8Dec 15Dec 22Dec 29Jan 5 Jan 12Recent weekly PSPP purchasesSource: ECB80859095100105110115 Altice Luxembourg’s Feb 2025s3/2/153/4/153/6/153/8/153/10/153/12/153/2/163/4/163/6/163/8/163/10/163/12/163/2/173/4/173/6/173/8/173/10/173/12/17