Europe Financial Bond: Commerzbank's US$1bn Additional Tier 1

IFR Awards 2019
3 min read
Tom Revell

Out of the park

An inaugural Additional Tier 1 issue is a significant undertaking for any bank. Making a first impression in the riskiest and most costly end of the capital structure is never straightforward.

For Commerzbank, the feat was even more complicated given merger talks with larger rival Deutsche Bank. Still, its US$1bn Reg S-only perp non-call 2025 AT1 debut generated frenzied demand, surpassing expectations and changing perceptions of the bank.

Commerzbank had long been conspicuous by its absence in the AT1 market. It began preparations in 2018 as a supportive regulatory jigsaw fell into place but was forced to put the project on ice when the bank entered merger talks with Deutsche Bank in March.

Commerzbank also had to tackle the reservations of some investors about the credit and the German banking sector, where profitability is challenged.

"We are like Marmite: not for everyone, and therefore not the easiest name to execute," said Remi Veyrenche, bond syndicate at Commerzbank.

In the end, the issuer's groundwork and wise choices – and some good fortune – produced a result well beyond expectations.

“I would argue it was a model trade,” said Franz-Josef Kaufmann, deputy head of capital management and funding. “We did everything right, but we also got some luck in respect of market conditions.”

When the merger talks came to an end, Commerzbank moved quickly to get the trade up to speed. The delay proved to be fortuitous, as Commerzbank was presented with a highly conducive pre-summer window. Yields were plummeting thanks to accommodative central banks and rates forecasts were being redrawn. That put AT1 and their higher coupons near the top of investors’ shopping lists.

Crucially, Commerzbank changed its plans in the interim, dropping a euro trade in favour of a Reg S US dollar issue. Tapping US dollars offered a sizeable saving, but also meant Commerzbank could leverage its popularity among Asian investors, building on a following earned with previous Singapore dollar issuance.

Leads Barclays, Commerzbank, HSBC, JP Morgan and UBS opened books with initial guidance of 7.50%-7.75%. The deal generated remarkable momentum, allowing for a 50bp-75bp tightening to a final price of 7%, the biggest price move of any AT1 since 2017.

"They've definitely smashed this out of the park in terms of landing at 7s," said a banker away from the deal.

Opinions on fair value were divided, but Commerzbank was said to have paid a slim concession at most. Some observers said the deal landed as far as 50bp inside fair value. The final book stood at more than US$10.5bn, a size unmatched in Reg S AT1s this year.

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