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Monday, 23 October 2017

RBS makes subordinated return with holdco Tier 2

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The Royal Bank of Scotland will price its first new euro subordinated issue since 2008 later on Thursday, and its first at the group level, as it continues to shift its issuance in preparation for regulatory changes.

The bank began marketing the 10 non-call five-year issue, which will be €1bn in size, via RBS, BNP Paribas, Societe Generale and UBS at guidance of 270bp area over mid-swaps.

The transaction is part of a broader move by the bank to shift issuance out of the operating company to facilitate resolution - if that were ever to happen.

Bonds issued out of the holding company make it easier for the authorities to resolve a bank, as it gives them a so-called “single point of entry”.

Back in November, RBS priced its first euro senior unsecured issue since May 2011, which was also sold at the holding company level.

At the time, a lead said the PRA was keen to have a single point of entry for resolution of subordinated debt, and that fast-forwarding 10 years, the balance sheet’s structure would be quite different.

“I would expect RBS to be a much more active issuer at the group level when it comes to sub debt. This will also give the group much more flexibility to downstream capital and make changes at the operating level.”

At the 270bp area initial price thoughts, a banker said RBS was not paying much of a premium versus where it would have sold a deal at the operating company level.

At the first update, books were over €2.25bn and guidance was revised to 265bp-270bp.

“There are a lack of alternatives in this zip code,” said a banker. “RBS was more price-sensitive than focused on size, which swayed the balance towards a tighter guidance. Banks have been focusing on issuing Additional Tier 1 and senior, so Tier 2 is getting squeezed as an asset class.”

So far this year, European banks have issued just under €10bn-equivalent in benchmark-sized old instruments in core currencies, while they have issued over €11bn-equivalent in new-style instruments.

Lead managers used the bank’s outstanding 2017 and 2018 Tier 2s as pricing points, with these quoted as tight as swaps plus 190bp on the former and as wide as 236bp on the latter.

Other comparables included Nationwide’s 2023s, quoted at mid-swaps plus 180bp, and Lloyds’ 2021s and 2020s, respectively at 145bp and 160bp.

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