A rare gem
Nationwide Building Society returned with its first sale of Core Capital Deferred Shares since it pioneered the equity-like security in late 2013, introducing an innovative structural feature to sidestep issues posed by investor pre-emption rights.
Unlike Additional Tier 1 bonds, which are callable and have fixed coupons, CCDS are truly perpetual, with variable and completely discretionary distributions.
This makes the unrated instruments much more akin to equity than debt, even though they are predominantly held by fixed income investors.
“This is the one trade that everyone saw back in the day and thought, ‘I really want to buy that for my own account’,” said a banker at the time of the sale.
With a Common Equity Tier 1 ratio of 26.4% Nationwide certainly didn’t need the capital, but wanted to improve the liquidity of the original issue, particularly since it remains the only public issuer of CCDS.
The outstanding £550m of securities, offering a 10.25% distribution, had rallied phenomenally since being priced at par. They were trading around 162 in early September when the new issue was announced, capitalising on a strong rally in the AT1 market.
“These are very rare securities and ones that we are very happy to hold,” said Mark Holman, a portfolio manager at TwentyFour Asset Management.
The deal came at 159, the upper end of guidance, with books closing on over 11.5m shares. At that price, the unrated notes offered a 6.44% yield and raised £795m of CET1.
The transaction incorporated an innovative “cash box” mechanism, more commonly seen in the equity market, that allowed the new CCDS to be issued for a non-cash consideration in compliance with the requirements for non pre-emptive issues contained in the original issue.
“We are hopefully seen as an investor-friendly institution,” said Alex Wall, Nationwide’s head of capital, rating agencies and investor relations. ”We thought it was in everybody’s interests to go down this route.
“It’s one of the only issuances I’ve seen where everybody was remarkably happy about the allocations that they received as a result.”
The structure saw Nationwide subscribe for ordinary shares in a new wholly-owned subsidiary incorporated in Jersey. JP Morgan received cash proceeds from the investors, using the proceeds to subscribe for redeemable preference shares in the new subsidiary.
Nationwide issued the new CCDS in consideration for JP Morgan transferring its holding of redeemable preferences shares in the subsidiary to Nationwide.
Wall described it as the issuer’s stand-out trade of the year.
“It was done with an accelerated bookbuild with a cash box settlement mechanism, so a little bit of financial innovation and raciness from what you would otherwise consider a fairly staid and sensible building society,” he said.
Bank of America Merrill Lynch, Barclays, Citigroup, JP Morgan and UBS were joint bookrunners. BNP Paribas and NatWest Markets were co-managers.