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Tuesday, 24 October 2017

RBS unveils plans for inaugural CoCo bond

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  • People stand near a branch of Royal Bank of Scotland (RBS) in London

Royal Bank of Scotland has capitalised on positive quarterly results on Thursday and announced firm plans to raise an inaugural Additional Tier 1 bond, putting an end to one of the market’s longest-awaited capital raisings.

The UK bank has mandated RBS as global coordinator and structuring adviser, together with BofA Merrill Lynch, Credit Suisse and Morgan Stanley as joint leads for the trade. RBS is the last of the major UK banks to issue a bond in this format.

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. 

“People are excited – it’s a long awaited mandate,” said a banker connected to the trade. “They’ve had their challenges but they’ve had pretty strong results this morning. For an investor, it’s a recovery story and it will offer a premium versus UK peers.”    

The bank will meet investors in the US and London from August 3, with a deal expected to follow in the second half of the week.

“In terms of debt, the critical thing is the CET1 number, which has gone up. It seems like a good time to announce an issue,” said another senior debt banker. The bond will convert into equity if the bank’s CET1 ratio drops below 7%.

As well as the 80bp rise in its CET1 ratio, RBS will receive a further 200bp–300bp boost from the intended reduction of its stake in US bank Citizens announced on Tuesday.

This may be particularly valuable given RBS’s capital could come under pressure when it settles claims it misled investors in US mortgage-backed securities.

The government, which still owns 78% of the bank, has signalled it wants to start selling down its stake as soon as possible, another key milestone.

Depth in dollars

RBS announced its intention to raise £2bn of AT1 in 2014 as part of an updated capital plan with the Prudential Regulation Authority following the UK stress tests.

That AT1 and other capital measures put forward by the bank at the time meant it did not have to resubmit a capital plan with the regulator.

But despite buoyant market conditions in the first quarter of the year, no deal appeared, leaving some investors puzzled.

RBS will turn to dollars, bypassing the euro market, which is already winding down for August.

 “The dollar market is fully functioning and feels a little bit deeper. It’s been very active so far this week and will be so for at least the next 10 days,” said the first banker.

“For European issuers, it is cheaper to issue capital in dollars compared to euros.”

ABN AMRO and Rabobank raised billions in the Tier 2 format recently, although RBS’s deal would be the first Yankee AT1 since ING’s dual-tranche in April.

Bankers think RBS may need to pay a substantial premium to compensate investors for lingering risks.

CEO Ross McEwan warned in April of another tough year as the bank confronts a mammoth restructuring and “conduct and litigation hurdles”.

“They trade slightly wider in other securities and right now there is fairly healthy new issuance premium, perhaps 25/30bp, as well.”

Barclays issued 6.625% perpetual non-call five-year bonds last June, which are now bid around 7.03%, according to Tradeweb prices. A Lloyds 7.5% perp non call 10-year, also issued last year, is bid around 6.82%.

The bank is unlikely to tackle its full target in one swoop, more likely opting for a US$1bn to US$1.25bn initial deal. A second tranche could follow in the autumn.

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