Raiffeisen Bank International got the price right to ensure momentum for a €500m 10.5 non-call 5.5-year Tier 2, launched in conjunction with a buyback of a Tier 2 set for a 2020 call.
Bank Tier 2 issuance has been limited since the euro market reopened after the summer, with a KBC trade on August 27 and a pulled Bank of Ireland trade last week the only other attempted deals.
But a syndicate banker at one of RBI’s leads said that after a collapse in yields the product “sits in quite a nice spot”, as the Austrian trade highlighted.
“For all these insurers and pension funds that don’t buy Additional Tier 1, effectively most of the index in covereds and senior preferreds is in negative yields and some of senior non-preferred is going into negative yields,” he said.
“Clearly, Tier 2 is the one place they can get a plus 1% coupon … and that really benefited RBI.”
The Austrian lender hit the screens last Wednesday morning with initial price thoughts of mid-swaps plus 250bp area for a €500m no-grow trade.
Leads BNP Paribas, BAML, Citigroup, RBI and UBS then set guidance at 220bp-225bp, before fixing the spread at 210bp on more than €2.75bn of demand.
It was priced with a coupon of 1.50% to yield 1.601%, offering a substantially larger coupon than KBC’s €750m 10.25NC5.25-year Tier 2 the week before. The Belgian’s 0.50% coupon was a record low for the sector.
THE PRICE IS RIGHT
The strong interest was welcomed by the market after Bank of Ireland last Tuesday pulled its €300m Tier 2 issue, having received interest of €340m-plus. Brexit headlines were blamed, although some bankers away said it was a question of the Irish deal’s price.
Bankers said RBI got the price right and ensured impetus for the trade by starting some 40bp or more back of fair value.
They said it is necessary for issuers to approach investors with an attractive starting point given a relatively fragile market backdrop, even if that premium is taken away in subsequent pricing moves.
“You have such big macro events coming up and credit has definitely been under pressure,” said a syndicate banker away.
“In that context, it’s really important to get the price right.”
Bankers differed slightly on the exact concession RBI paid. Some saw fair value in the low 200s and others put it at around the landing point of 210bp. Being precise was difficult given a lack of comparables.
A €400m 2.375% 10NC5 Tier 2 from fellow Austrian issuer Bawag was quoted bid at 203bp on Wednesday, although that deal is rated one notch higher than RBI’s, at Baa2. Bankers also looked at similarly rated German paper and peripheral comparables.
Bankers said the deal’s appeal was broadened by its investment-grade rating and boosted by RBI’s rarity in the format. The deal, expected to be rated Baa3 by Moody’s, is its first Tier 2 since 2014.
Also last Tuesday, RBI launched a tender offer for its €500m 4.50% Tier 2 coming up for call in February 2020.
A DCM banker at one of the leads said such exercises are a win-win for all sides, as investors get a free option to exit and potentially a premium, while issuers get greater freedom to manage possible volatility down the road.
“It’s a good treasury management tool to be able to buy back and issue, to be able to optimise your balance sheet, especially when there’s such a focus on net interest income,” he said. “It’s becoming more mainstream and accepted.”
He added, however, that buybacks are typically restricted to trades with a call date longer than five years. Historically, regulation has broadly prevented banks from tweaking or calling capital securities within five years of issuance.
The deal targeted by RBI is an 11 non-call six-year.