Friday, 19 July 2019

Sterling Bond: Nationwide’s £1bn perpetual AT1

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Nationwide achieved what many thought was impossible in 2014. As the UK’s largest building society, the firm was in a unique position to test the sterling Additional Tier 1 market.

By the time Nationwide emerged in March (via Citigroup, Deutsche Bank, RBS and UBS) with its £1bn 6.875% perpetual, investors were prepared. Many of them had been thoroughly educated in Nationwide’s business model the previous November when it set out to sell the first core capital deferred shares, an instrument that would provide the backing to the AT1.

Both the £500m CCDS and the £1bn AT1 help the issuer meet demands from the Prudential Regulatory Authority that it beef up its leverage ratio ahead of the 2019 Basel deadline.

Nationwide followed in the footsteps of European banks such as UBS, Barclays, Societe Generale and BBVA that all raised this kind of subordinated debt to beef up their capital bases, although this was the first time a financial has diversified into the sterling market.

So, for the UK market the Nationwide deal set a benchmark.

“This is an incredible result for Nationwide but also it shows the depth of demand the sterling market can offer, which up until now had been seen as a niche currency for AT1 issuance,” said Gordon Taylor, head of financial institutions DCM at RBS.

Following Nationwide’s triumph, domestic names such as Lloyds and Virgin Money followed suit. But more importantly, European names including Deutsche Bank and Credit Agricole saw a new pocket of demand to fulfil their multi-billion AT1 needs.

The pricing on the 6.875% contingent capital bond issue impressed many. Coming some 10bp–15bp inside where euro and US dollar offerings would have come, it made sterling look not only like a strong diversification play but a competitive alternative to rival markets.

The £11bn book also surpassed the issuer’s expectations and highlighted the deep pockets of investors and the quantum of accounts that could take part in such an offering.

“I didn’t even know there were 500 sterling investors that could buy the trade,” said Andy Townsend, treasurer at Nationwide.

That wide investor base also caught the attention of other mutuals. Coventry Building Society went a step further than Nationwide in June and raised AT1 debt that converts into something that does not yet exist.

Coventry priced a £400m perpetual non-call 5.5-year issue that converts into CCDS if its Common Equity Tier 1 ratio falls below 7%. However, unlike Nationwide, which issued CCDS before going to the AT1 market, Coventry skipped that stage.

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