Fri Aug 9, 2013 12:00pm EDT
(Corrects spelling of investor name in paragraph eight)
* Bail-in risks prompt capital reassessment
* Investor evolution benefits CoCo issuers
* Credit Suisse prepares for further CoCo issuance
By Aimee Donnellan
LONDON, Aug 8 (IFR) - Raising vanilla Tier 2 capital is to become a more costly exercise, as investors cozy up to low-trigger total loss CoCos that similarly put their principal on the chopping block in a bank failure, but offer much higher yields.
Last week, Credit Suisse priced a USD2.5bn low-trigger total loss contingent capital (CoCo) with a coupon of 6.5%, just 150bp back of where its vanilla Tier 2 bonds were trading, and bankers say they expect this pricing gap to tighten even further.
"Investors are now realising that almost every debt instrument carries some level of bail-in risk with increased regulatory clarity," said Sandeep Agarwal, head of European DCM at Credit Suisse.
Although it makes sense for bankers to be making this argument - particularly those from banks that are being encouraged by their regulators to issues CoCos - what is surprising is that investors agree.
Societe Generale was first to suffer the effects of this relative value turnaround when it struggled to convince accounts to buy into its aggressively priced EUR1bn 4% 10-year vanilla Tier 2 bullet in May. The deal emerged only two weeks after UBS offered nearly 150bp more for a USD1.5bn 10-year non-call five-year low-trigger CoCo.
At the time, investors said they could not rationalise buying a French bank that was exposed to a number of problems in the periphery over a Swiss institution that is now focusing on wealth management, regardless of the total write-down language.
And last week, Credit Suisse benefited from the same viewpoint.
"Although vanilla Tier 2 is viewed as safer than CoCos, there is still considerable risk for a Lower Tier 2 bondholder if a bank runs into trouble," said Robert Montague, a senior financials analyst at ECM Asset Management.
"Situations like SNS and Cyprus have made investors demand more spread for the risk that they are taking."
CAPITAL RE-EVALUATION
Indeed, shock legislative moves this year by the Dutch and Cypriot governments that wiped out investors' Tier 1 and Tier 2 bonds led to a complete re-evaluation of subordinated debt.
"Everyone realises now that if you are an investor in subordinated debt you are fair game in a bail-in scenario," said a DCM banker.
For this reason, accounts are now willing to accept a smaller concession for instruments that have total loss language.
Investors say that when you assess the figures, low-trigger CoCos offer ample compensation for the risk.
Credit Suisse's bonds will be permanently written down to zero if the bank's Common Equity Tier 1 (CET1) capital to risk-weighted assets ratio drops below 5%.
This means that for a bank like Credit Suisse with a CET1 ratio of 15.3% and 2.8% of high trigger Buffer Capital Notes, there is a cushion of over 1300bp before investors will be wiped out.
CHANGING MARKET
It must be said that Credit Suisse is in something of a unique CoCo situation.
It was the first bank to test the product with new investors and, according to Kim Fox-Moertl, head of capital management in Credit Suisse's global treasury, investors have grown more and more comfortable with the product.
"The tone of conversation we are having with investors has completely transformed over the past two-and-a-half years," she said.
"At first we were speaking about the logic of CoCos and the concept of loss absorption, but now investors are much more comfortable with the price and strength of the product."
In the wake of the bond sale, Credit Suisse says it has plans to do a follow-up deal in the coming year as it seeks to meet the Swiss regulator's requirements and take advantage of the growing appetite for high-yielding instruments.
The USD6.6bn of demand the deal attracted has sent a clear message to other European and UK banks that investors are willing to buy these instruments despite the risk of being written down to nothing.
"This is a very important product to Credit Suisse as an issuer and we will look to issue in a range of maturities and currencies in follow-up transactions," said Credit Suisse's Fox-Moertl. (Reporting by Aimee Donnellan; Editing by Julian Baker and Philip Wright)
- Link this
- Share this
- Digg this
- Reprints
Anda sedang membaca artikel tentang
CORRECTED-Tier 2 costs to rise as investors reassess CoCo risk
Dengan url
http://streswajah.blogspot.com/2013/08/corrected-tier-2-costs-to-rise-as.html
Anda boleh menyebar luaskannya atau mengcopy paste-nya
CORRECTED-Tier 2 costs to rise as investors reassess CoCo risk
namun jangan lupa untuk meletakkan link
CORRECTED-Tier 2 costs to rise as investors reassess CoCo risk
sebagai sumbernya
0 komentar:
Posting Komentar