Fri Apr 26, 2013 8:37am EDT
* UniCredit Reg S Tier 2 hailed as watershed moment
* Regulatory clarity to drive banks into sub market
* BBVA goes a step further with first Additional Tier 1
By Aimee Donnellan
LONDON, April 26 (IFR) - UniCredit's well-received subordinated bond has delivered a vital shot of confidence to the market, and could be the push that peripheral banks need to finally pull the trigger on capital deals that have been waiting in the wings for months.
The Italian borrower's USD750m 10-year non-call five-year, which priced on Wednesday with a 6.375% yield, had been in the works since February. It coincided with a strong peripheral rally over the past week that helped secure an order book in excess of USD3bn.
"Every bank in Europe is looking at raising capital this year, and the success of a deal from UniCredit, with a callable structure, will certainly inspire others," said Antoine Loudenot, head of capital structuring at Societe Generale.
The new Tier 2 bond, led by BNP Paribas, Citi and UniCredit, is trading marginally tighter in the secondary market on Friday, quoted at 549bp over mid-swaps from its plus 551bp equivalent pricing level.
On the back of the deal's success, BBVA went a step further on Friday with the announcement of an even more ground-breaking structure. It is planning to sell an Additional Tier 1 security which complies with the region's new Capital Requirements Regulation (CRR) - the first deal of its kind to be marketed.
The perpetual Reg S bond will have a 7% Common Equity Tier 1 conversion trigger and will be marketed next week in Asia, the UK and Switzerland by joint bookrunners BBVA, Bank of America Merrill Lynch, Goldman Sachs and UBS.
UniCredit said AT1 is also on its radar.
"Everyone is looking at Additional Tier 1 because they know they have to fill the 1.5% bucket, so we certainly won't be the first out in this space," said Waleed El-Amir, senior vice-president of UniCredit's strategic funding and investments business.
CAPITAL RACE COMMENCES
The majority of European banks have so far abstained from issuing Tier 2 capital this year, with only Standard Chartered and Nationwide braving the market to sell a combined EUR2.75bn-equivalent in January and March.
But that all looks set to change with the European Parliament's adoption of CRD IV last week, offering clarity to banks that were unsure about how Tier 2 instruments would be treated in a recovery situation.
BBVA, Santander and Intesa have capital levels of between 12% and 13%. Although this meets regulatory requirements, they are trailing behind Nordic and Swiss peers that have increased total capital to at least 18%.
According to Waleed El-Amir, this clarity, as well as a supportive market backdrop, encouraged UniCredit into the market.
"We felt that the implications of CRR had already been laid out with situations like Anglo Irish, SNS and Cyprus that offer a very clear idea of how the resolution regime will be implemented," he said.
"Point of non viability and loss given default look relatively straight forward, so I think it makes sense to issue Tier 2 now."
PERFECT TIMING
The strong market backdrop is setting the perfect tone for capital deals.
Italian 10-year yields fell to 3.93% at one point on Tuesday - the first time they have broken below 4% since September 2010 - after President Giorgio Napolitano gained a second term, reducing the threat of another election.
The upbeat conditions were a key factor in investors' willingness to buy a callable bond, particularly after Intesa Sanpaolo changed the call policy on some of its subordinated bonds last year.
"The callable structure is definitely a harder sell to investors but we thought it was important to show that Italian banks are able to place these kinds of structures with investors," said El-Amir.
"We think it has given a massive boost to the bank capital sector."
Although UniCredit is known to have met the 9% Core Tier 1 ratio as stated in the EBA's December 2011 recommendations, market observers were still pleasantly surprised by its success.
"This was an excellent deal with the right price that has clearly proved attractive to a lot of investors that are desperate for yield," said a syndicate banker.
"The issuer clearly made the most of a supportive market and regulatory backdrop." (Reporting by Aimee Donnellan; Editing by Natalie Harrison, Philip Wright, Julian Baker)
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