In a year of historically tight prints it may seem contrarian to recognise Novo Banco’s €400m 8.5% 10-year non-call five Tier 2 bond. It carries, after all, the biggest coupon of any public euro transaction sold in the financial sector over the period.
But that coupon is testament to the execution risk inherent in one of 2018’s most challenging and complex deals. This was not just about capital optimisation: having neared resolution last year, the deal was integral to the bank’s survival.
Novo Banco was carved out of failed Portuguese lender Banco Espirito Santo. The bond issue was announced alongside a liability management exercise, together designed to shore up capital and reduce the interest expense of 20 outstanding securities.
Existing bondholders were invited to tender their bonds for cash or switch into the new notes (rated Caa3/CCC). In the event, those investors accounted for €258.8m and new money the remaining €141.2m.
The fact that more bonds were exchanged than tendered showed that investors did not necessarily want to reduce their exposure, but wanted to use the opportunity to get access to a more liquid security and move down the capital structure.
In an unusual twist, bookrunners JP Morgan and Morgan Stanley set a minimum yield of 8.5%, a sweetener in one of the toughest issuance backdrops for years and offsetting the limited premium built into the liability management exercise.
There was no need to inflate the yield, nor call on the backstop provided by the Portuguese Resolution Fund, after orders passed €300m. That was despite the boycott of various investors who suffered losses when the Bank of Portugal transferred several securities back from Novo Banco to BES in late 2015.
The outcome marked a pivotal step forward for Novo Banco, proving its market access and implying investors bought into its turnaround story even if the bank is far from being out of the woods. Despite the widening in credit spreads, the bonds are bid tighter than reoffer, at an 8.20% yield.
The deal’s success also reflects the issuer’s practicality in swallowing the price it needed to pay in order to appease its regulator and unlock the next stage of its recovery process.
Given the deterioration in issuance conditions over 2018, the deal looks particularly timely in hindsight. It also proved there is demand for sub-benchmark, low-rated paper at a time when there is still no shortage of struggling banks across Europe.