By Helene Durand and Anna Brunetti
Fri Aug 29, 2014 9:09am EDT
LONDON, Aug 29 (IFR) - Banco Santander and UniCredit will provide the first test of investor appetite for Additional Tier 1 debt in Europe after the asset class was buffeted by serious headwinds during the summer months.
Banks have not tapped the European AT1 market since a triple-tranche 3.5bn-equivalent deal from Deutsche Bank in mid-May when demand for the product was still strong.
However, since then, banks' subordinated debt and AT1 in particular has been hit by volatility with cash prices yo-yoing five to six points from week to week. Banco Popular Espanol was one of the victims and had to pull a transaction in early July.
Meanwhile, the Banco Espirito saga, which saw the bank's subordinated debt left in the bad bank following its restructuring, acted as a reminder of the depth of losses investors can be exposed to, while the lack of secondary liquidity amplified some of the moves.
The market has since recovered and bankers believe that the backdrop to sell AT1 has improved markedly.
"The BES situation had a massive impact on the market initially but it has since recovered and has been to compartmentalise the situation and it was not a point of contagion," said a syndicate banker. "We have had three/four months of no supply and there is a lot of cash to be put to work."
Banco Santander, rated Baa2/BBB/BBB+, mandated Credit Suisse, HSBC, JP Morgan, its own syndicate team, Societe Generale and UBS, and is expected to go first.
The issuer is planning a one-day roadshow on Monday and execution is expected the following day.
Meanwhile, UniCredit, rated Baa2/BBB/BBB+, which mandated Bank of America Merrill Lynch, CA-CIB, Credit Suisse, Deutsche Bank and UniCredit, will see investors over two days with pricing expected for Wednesday.
"It'll be certainly interesting to see how that will work," another syndicate banker said.
"It's likely that the market is strong enough at present to take both deals, so we expect them to be complementary rather than competing."
RARITY VALUE
It will be UniCredit's first euro-denominated AT1, following the launch of a US$1.25bn perpetual non-call 10-year that priced with an 8% coupon in March.
"There is serious rarity value in Italy and I would expect UniCredit to benefit from that," the banker said.
UniCredit's dollar issue is the only outstanding Additional Tier 1 deal from an Italian bank. That transaction was quoted at a cash price of 105 on Friday, giving a 7.3% yield and spread of 495bp over swaps.
Santander will not benefit from the same rarity value given two previous issues in the format, while BBVA has also tapped both dollars and euros.
Santander's euro note priced at a yield of 6.25% and has tightened to 5.86%, or a cash price of 102. The May dollar bond, which priced at 6.375%, has failed to perform so well, widening to 6.6% to trade at 99.3 according to Tradeweb.
The new deal is expected to mirror the structure of the previous euro bond, a syndicate official said, with the same low trigger of 5.125% for conversion into equity.
While UniCredit will have the same low 5.125% Common Equity Tier 1 trigger, it will have a temporary write-down structure - the first time that the two structures go head to head in the market.
"It might be a test of what investors prefer in terms of loss absorption mechanism but at the end of the day, technicals will dominate where the deals price, and they are very strong right now," said the first syndicate banker.
With pressure mounting for banks to shore up their capital beyond minimum requirements, the second syndicate official said that at least one more peripheral lender is poised to follow in the AT1 space in the next couple of months.
He also expects Irish and Portuguese lenders to come to the market with debut AT1 deals in 2015. (Reporting By Helene Durand, Anna Brunetti, Editing by Julian Baker)
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