By Alice Gledhill
Fri Feb 13, 2015 11:57am EST
LONDON, Feb 13 (IFR) - Investors that have been left with few options but to pile into riskier assets in order to pick up some yield are expected to give strong support to the Additional Tier 1 market, which is expected to grow further in 2015.
UBS was the fourth bank to join the fray this week with an inaugural triple-tranche offering, and further deals from Nykredit and Svenska Handelsbanken expected in the coming days.
And this is just the tip of the iceberg with European bank issuance volumes expected to hit EUR65bn-equivalent in 2015, according to Morgan Stanley's figures.
"Once QE actually starts and yield/returns grind out of other sectors, CoCos which yield north of 5% will inevitably look cheap," said Chris Telfer, portfolio manager at ECM.
"In order to chase yield and increase diversification, portfolio mandates will likely change over the next six months to allow for increased non-investment grade credit allocations, particularly after S&P downgraded Lower Tier 2 financial bonds in Q4 and CoCos become a larger part of the market."
The European Central Bank's announcement in January that it would buy as much as EUR60bn of assets from March until at least September 2016 is providing much needed support for the market at a time where the excitement of the first deals has well and truly died down.
"The market for AT1s is more mature and the investor base is certainly wider than a year ago - this helps to absorb the new supply," said Eoin Walsh, portfolio manager at 24 Asset Management.
And with capital buffers and capital quality improving across the board, AT1s from a broader range of issuers will look increasingly appealing.
The solid demand for this week's dollar issue from Swedbank - the highest capitalised bank in Europe with a 21.2% Common Equity Tier 1 ratio - provided further proof that the strength of banks' balance sheets is a key consideration for investors.
CHOPPY WATERS
But while the long-term outlook looks rosy, the success of individual deals still rests on the ability of syndicates to navigate a range of constraints.
The recent flurry of deals, for example, showed that competing supply can weigh on the execution process. Leads on Danske's BB+/BB+ rated deal flagged some price sensitivity in the book, which investors attributed to Swedbank's investment-grade inaugural offering waiting in the wings.
"It's a good time to issue after results and the market is looking firm, but there may be a level of indigestion if there are too many at the same time. That BBVA opened wider may be an indication of this," said one investor.
BBVA posted one of the biggest books of the week for its euro 6.75% perpetual non-call five bond, but the deal languished in the secondary market and was bid over 7% on Friday afternoon.
Furthermore, repeat issuers such as BBVA may need to pay slightly more premium given the expectation of further supply, the investor said, although this is unlikely to be more than 25bp.
Issuers with lofty size aspirations may also have to pay up, warned a banker. "If you want to take out real size, for example EUR1.5bn, you will need to pay a bigger premium."
Moreover, volatility in the asset class has put off some investors.
"Some investors such as hedge funds tend to inflate orders for hot deals, and they are absent in order books in trickier transactions or on days of less clarity," said Per Høg Jensen, head of financial origination at Danske Bank.
But bankers said this may be no bad thing as the paper remains in the hands of long-term holders - and from an issuer's perspective, the deal still gets done.
But Jensen added that market-making in AT1 instruments has become much more fragile, which can catalyse an initial softening. "You will find that some lead managers are not there to support transactions now." (Reporting by Alice Gledhill, Editing by Helene Durand, Julian Baker)
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