EUROS
RABOBANK SWEEPS ASIDE ANY DOUBT
OVER EURO AT1 DEMANDRABOBANK was buoyed by demand for the
first euro benchmark Additional Tier 1 in
nearly five months, with its €1bn PNC2025
deal covered almost five times.
The bond launched at 4.625% on a
€4.75bn book and drew more than 300
orders.
Lack of recent supply was a clear driver
for that appetite. KBC Group’s €1bn 4.25%
PNC2025 in April was the last euro
benchmark, though the response to dollar-
denominated AT1 supply over the summer
was encouraging.
Bookrunners Credit Suisse, Goldman Sachs, JP
Morgan, Morgan Stanley and Rabobank began
marketing with initial price thoughts at 5% area.
“I think it’s a really good trade,” said a
banker away. “It’s bang in line with whatwe were expecting in terms of pricing. ...
Five percent area seems to encompass all
of the broader feedback from accounts we
spoke to, which is exactly what you need
to do.”
Not only is Rabobank an infrequent issuer
of AT1 debt, the bond is rated Baa3/BBB-
(Moody’s/Fitch) and eligible for
investment-grade funds.
But large parts of the investor base have
been burnt by poor performance this year.
Of the nine public euro AT1s sold in 2018,
only Sydbank’s €100m 5.25% PNC2025 was
bid above par on Tradeweb last week,
though conversely new issues offer better
value after the back-up in yields.
“It has been a long time since another AT1
in euros has been priced, which made it a
little more difficult to assess as to where
investors would care for such a transaction -
that’s why we chose a day-and-a-half
execution window, just to spend time with
investors,” said Rabobank treasurer Robbert
Muller.“It was a textbook execution from our
perspective.”
A lead cited Nordea’s €750m 3.5%
PNC2025 (BBB/BBB) and HSBC’s €1bn 6%
PNC2023 as the best comparables, which
have respective low and high back-end
spreads. Together, they pointed to fair value
in the low 4s.BREATHING SPACE
It was the first Dutch AT1 issue since the
country’s government scrapped the tax-
deductibility of coupons on contingent
convertible securities in July, applicable
from January 2019.
Rabobank describes the impact on its
funding costs as manageable and swiftly
reassured investors in July that it would not
make use of the tax call on the two
instruments within scope.
It removed the option to call for the loss
of tax deductibility on the new instruments
given the government’s decision renders it
obsolete.36 International Financing Review September 8 2018Rothesay Life bypasses roadshow for debut RT1
n FINANCIALS Sector’s underperformance has created a pocket of value
ROTHESAY LIFE managed to pull off a debut
Restricted Tier 1 despite taking the unorthodox
decision to proceed with the trade without any
formal marketing.
Issuers traditionally choose to meet investors
ahead of strategic projects such as raising
deeply subordinated debt. The RT1 asset class is
also still relatively young and the sterling market
is notoriously difficult to navigate.
However, Rothesay’s mandate announcement
last Wednesday morning was quickly followed
by IPTs of 7% area for a PNC10 (rated BBB-
with Fitch), prompting speculation among
market participants that the bond had been
hard underwritten by sole bookrunner Morgan
Stanley.
While the practice is not uncommon, it can
backfire should the bank fail to sell all the bonds
at the agreed level and is left long in a widening
market.
In this case, however, the strategy appeared
to pay off. Demand closed over £500m, allowing
the coupon to be set at 6.875% and the deal to
be upsized from £300m to £350m. The bond
was wrapped around par last Friday, according
to Tradeweb.
Market participants speculated after the
announcement - coinciding with Rothesay’s half-
year trading update - that accounts had been
wall-crossed. Though this process can prove
onerous, it would have helped to de-risk the
transaction given that significant buyers in the
sterling market can make or break a trade.Rothesay’s approach is at odds with that
of Direct Line, which announced a roadshow
prior to opening the sterling RT1 market last
November. It also raised eyebrows, given that
Rothesay is likely to become a much more
frequent borrower.
“The sterling market can be a bit crabby and
they like to be treated with respect; people like
to speak to management - and this is a debut
RT1,” said one banker.
“They’re one of the new kids on the block.
They could be doing two to three deals a year- think of their size ambitions, they’re growing
hand over fist. You’ve got to start to develop a
track record of good execution.”
Rothesay specialises in bulk annuities and
other de-risking solutions for defined benefit
pension schemes and insurance companies and
announced in March that it would acquire a
£12bn annuity portfolio from Prudential.
Covering around 400,000 policyholders,
it is the largest transaction of its type in the
UK and takes Rothesay’s group assets under
management to £36.7bn as at June 30 2018.
“For a credit like that, which is clearly not a
regular issuer in the market, I’m not sure that’s
the strategy I would pick,” said a second banker.
“If they had marketed, maybe they’d have got a
bit more traction.”
RISKY BUSINESS
On the other hand, Spanish insurer Mapfre
chose to pre-announce a euro benchmarkTier 2 the previous week. That prompted its
outstanding bond to widen more than 30bp,
pushing up the issuer’s cost of funding after
losing the element of surprise.
Furthermore, volatile market conditions in
2018 have left issuers exposed to execution
risk, with many mandates failing to reach the
execution stage.
Bonds issued by Direct Line and Phoenix offered
the most useful pricing comparables. Direct Line’s
£350m 4.75% PNC10 was trading at 6.61% but,
unlike Rothesay, it is sub-investment-grade rated
(BB by S&P). The Phoenix £500m 5.75% PNC2028
(rated BBB- by Fitch) was yielding 7.23%.
Rothesay has just one other subordinated
bond outstanding, a £250m 8% 10-year Tier
2 that it sold in October 2015. That note was
quoted at 4.20% on Wednesday, according to
Thomson Reuters. Together, those comparables
pointed to fair value around 6.50% to 6.625%.
“RT1s in 2018 have underperformed and
are now trading at similar levels to deeply
subordinated bank debt, as this latest Rothesay
Life issue illustrates with a 6.875% coupon and
a spread of around 545bp over Gilts for a BBB-
rated issue,” said Gary Kirk, a portfolio manager
at TwentyFour Asset Management.
“It seems the level of compensation is now at
a point where the sector is showing some real
relative value again.”
Barclays, Lloyds and NatWest Markets were
joint lead managers (no books).
Alice Gledhill6 Bonds 2250 p25-55.indd 36 07/09/2018 19:29:59