Tuesday, 18 September 2018

FIG: RBS tears into AT1 market; Barclays slips in sterling AT1

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The bank priced two tranches following an earlier roadshow in the US and London: a US$2bn perpetual non-call five at 7.5% and a US$1.15bn perp non-call 10 at 8%.

The final book size was not disclosed by RBS, but bankers close to the trade said orders reached US$22bn - US$12bn for the PNC5 and US$10bn for the PNC10.

RBS had first flagged its intention to issue AT1 capital this year in December, meaning investors were well prepared for its arrival. One said he had expected it as early as March.

“The fact that people had earmarked cash for it helped,” said one syndicate official. “It’s a very attractive asset to own for people that believe in the story - and it was easier to believe in that story after the recent results.”

The state-backed bank posted an unexpected profit, as well as an 80bp rise in its CET1 ratio to 12.3%, between March and the end of June.

“I think it came tighter than you might initially have expected, but there is so much cash for it waiting on the sidelines it was almost an inevitability,” said the official.

The bank still faces a number of hurdles, including an impending settlement with US authorities, but the response confirmed the deal was well timed.

“Other than looking at relative value, we looked at other factors – the fact that RBS is deleveraging (however slowly), and that it has reduced its stake in Citizens, which will push its capital ratios up. And there is very positive sentiment around the name following the placement of the first tranche of equity by the state,” said Gildas Surry, a portfolio manager at Axiom Alternative Investments.

“It offered decent value. Because there will be more AT1 issuance from RBS, the deal has to perform.”

RBS was global coordinator and structuring adviser, with Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley joint leads.

The deal is likely to be last major trade from a European bank until activity picks up in the last week of August. But Abbey National Treasury Services showed that the euro market remains open for opportunistic trades.

It began marketing a minimum €250m tap of its €800m May 2019 senior floater at guidance of three-month Euribor plus 60bp via Nomura and Santander (B&D).

Barclays slips in sterling AT1

Barclays was one of three banks in less than a week to capitalise on strong earnings figures and a newly opened issuance window to print Additional Tier 1 paper.

“Market conditions have been stable recently and investors are searching for yield, with AT1 especially in demand,” said Mark Geller, head of financial institutions syndicate at Barclays.

“We saw the RBS announcement and the subsequent UBS transaction which executed at the end of last week - on the back of this we felt that there was a good opportunity.”

A dearth of recent supply in the AT1 sector helped drive orders over US$7.5bn for UBS’s Reg S US$1.5bn perp non-call 10 last Friday, while RBS found massive demand for an inaugural SEC-registered US$3.15bn dual-tranche deal on Wednesday.

Strong results, particularly for its capital metrics, strengthened Barclays’ case for issuing this week. The bank’s CET1 ratio grew by 50bp in the second quarter to 11.1%, meaning it has met its end-2016 target roughly 18 months early.

Unlike RBS, Barclays is a familiar face in the AT1 market and could therefore move quickly, announcing the trade on Monday and opening books on Tuesday.

“It changes the premise of the conversation if you’re a repeat issuer. It’s less of a debate in terms of the fair level, as you have outstanding data points. It’s just a question of new issue premium rather than your credit story,” said one banker.

Barclays set initial price thoughts for the self-led perpetual non-call seven sterling benchmark at 8% area (quarterly yield). Guidance followed at 7.875% area, and it later priced in line at 99.99 with a 7.875% coupon. Its expected ratings are Ba2/B+/BB+.

Final books were around GBP3.4bn for a GBP1bn deal and the bonds were bid around 101 on Wednesday afternoon.

Fund managers took 74%, hedge funds 22% and bank/private banks 4%. The UK/Ireland took 88%, Germany/Austria 3%, other Europe 5%, Asia 2% and others 2%.

One step closer

The deal takes Barclays one step closer to meeting its end target of around GBP8bn of AT1 capital at the holding company level.

”At half-year we had £4.3bn of AT1 outstanding and we are targeting 2% in AT1 form assuming £400bn of RWAs,” said Miray Muminoglu, head of long-term unsecured funding and capital issuance at Barclays.

“We will be a measured issuer of AT1 – we have plenty of time to build towards this 2% target.”

Barclays will now issue the majority of new debt from the holding company as it squares up to new global standards for loss absorbency.

The UK lender said in its first-half results presentation that it was expecting to conform with TLAC primarily through the refinancing of operating company debt with senior unsecured paper issued out of its holding company.

All capital will be issued at the holdco level from now on.


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