North America Financial Bond House: Citigroup

IFR Awards 2018
5 min read
Natalie Harrison

In a year when banks looked to the US dollar bond market to sell debut capital deals, and flatter yield curves and market volatility saw both opportunities and disruptions, one bank showed leadership in structuring and timing trades. Citigroup is IFR’s North America Financial Bond House of the Year.

Bond issuance from financial institutions accounted for just over half of all US investment-grade bond supply in the IFR Awards period with more than US$600bn of deals priced.

An important portion of that was rare or first-time regulatory capital deals such as senior bail-in debt, non-preferred issues and callable structures from issuers all over the world, including Australia, Canada, Europe and the US.

Citigroup was at the forefront of almost all of them, requiring a ton of work with borrowers, regulators, rating agencies and the buyside – all before actually selling the trades in a choppy year for the bond market.

“We differentiate ourselves through the issuance of inaugural transactions, and deals that are the first of their kind, particularly relating to regulatory capital and bail-in compliant offerings,” said Peter Aherne, head of North America capital markets at Citigroup.

The timing of such deals really mattered in a year of intense volatility.

One of the more notable capital deals Citigroup worked on was Royal Bank of Canada’s US$1.8bn senior bail-in issue that caught a brief good window in October.

It priced with a bail-in premium of just 10bp. That was a particularly tight premium compared with some of its high-quality peers in other jurisdictions, according to Aherne.

It wasn’t always clear that kind of pricing was achievable as both rating agencies and investors were not fully aware of the distinctions between the Canadian bail-in framework and those in other countries.

Canada’s is more investor friendly because of a “no creditor worse off” policy and Citigroup was part of a significant teach-in with buyside accounts and salesforces to get people up to speed, Aherne said.

Citigroup also led debut senior non-preferred offerings for Nationwide and Danske Bank, and helped reposition Irish banks in the US dollar market after a long absence.

For example, it was a bookrunner on a debut dollar holdco deal for AIB Group – its first US dollar deal since the financial crisis – and a debut dollar holdco from its peer Bank of Ireland.

The US$1.5bn Additional Tier 1 from Lloyds Banking Group was another landmark trade that Citigroup helped lead. It was the first from the UK lender in more than four years, having last issued the securities in 2014 when it exchanged old Enhanced Capital Notes for AT1 bonds.

The deal went well, despite a volatile backdrop, garnering a US$5bn order book.

Citigroup also advised issuers on how to take advantage of a flattening yield curve by issuing longer-dated bonds at little extra cost.

Commonwealth Bank of Australia was one such beneficiary. Its US$1.25bn 30-year bullet Tier 2 – the first public offering of its kind from the Asia-Pacific region – saw the issuer pay very little in concession.

“Demand for duration is a manifestation of the relative cost for borrowers to extend duration in a flat yield curve. Having that insight and advice has proven useful,” said Aherne.

Innovation on deals for US banks was also something that Citigroup spearheaded.

Fixed-to-floating structures became the market standard for total loss-absorbing capital-compliant issues in 2017.

But Discover was the first US bank to sell a callable subordinated bond issue that had a fixed-to-fixed reset, and a one-time call date rather than several quarterly calls that fixed-to-floating structures typically have.

The novel structure helped ensure better pricing for Discover.

“There were a number of reasons why the fixed-to-fixed reset structure was viewed as more favourable for both Discover and the investor base,” said Aherne.

“Having only one call date reduces the company’s flexibility. It signals to investors a higher likelihood of the call being exercised given the loss of capital credit starting five years before the final maturity date.”

While no other US bank has executed a similarly structured Tier 2 instrument, Yankee issuers such as Bank of Montreal have leveraged the fixed-to-fixed reset versus mid-swaps structure that Discover used.

It took several weeks to get approval from the Federal Reserve in order to verify that the reset didn’t constitute a coupon step-up, which would have disqualified it from receiving Tier 2 capital treatment.

“It was only a US$500m trade but had a great deal of focus by both regulators and the Street. It was done at bank level versus holding company and we were able to move pricing in significantly – 22.5bp from IPTs,” said Aherne.

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North America Financial Bond House: Citigroup