The transition away from Libor has been anything but smooth, but BB&T helped solidify a sliver of stability in the preferred market in July when it became the first regional bank to price a perpetual note with a fixed-reset structure.
The big six US banks are largely promoting the Federal Reserve’s new benchmark – the secured overnight financing rate – but they have taken different views over complicated structural details such as suspension periods, look backs, compounding interest rates, backward-looking term rates and fallback language.
And, with the transition date fast approaching in 2021, it is clear the market is not fully confident in the new benchmark – especially after repo market volatility pushed the SOFR higher earlier this year.
So when North Carolina-based BB&T backed the relatively new fixed-reset structure, it showed there was a path forward not just for the transition period, but for years to come.
“Both issuers and investors are reluctant to take Libor risk even with fallback language, because it’s very complicated,” said Richard Myers, managing director in the investment banking department at Credit Suisse. “The traditional preferred structure of fixed for the first few years and then Libor plus the spread thereafter has essentially been replaced by this.”
Specifically, the perpetual fixed non-call five note allows the bank to reset the rate every five years over Treasuries and gives issuers a call option two times a year after the first five-year span.
Goldman Sachs first tested the structure for banks with a 5.5% fixed-reset perpetual note the month prior, which helped assure BB&T that there was market backing for the notes.
Bookrunners Credit Suisse and Morgan Stanley had to convince the issuer that the timing and structure were right for the bank’s debut institutional deal.
It paid off, as the note became the largest non-self-led preferred to price in at least a decade, according to Teddy Hodgson, head of US syndicate for Morgan Stanley.
M&T Bank and BMO followed with nearly identical deals that same week and Citigroup issued in the format months later.
At US$1.7bn in size, the BB&T deal was the largest regional bank preferred issuance ever at a time when negative yields globally drove investor appetite for high-yielding notes out of the exceedingly safe bank sector.
Bookrunners achieved a 4.8% coupon for the bank, which is among the lowest ever for a preferred note and came inside of similar notes from Goldman Sachs and Bank of America.
Investors pushed back on the break but the same structure from BMO came a day later at the same level and the BB&T note has since rallied in the secondary to trade above par.
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