Europe Financial Bond: Allianz’s €2.3bn-equivalent dual-tranche Restricted Tier 1

IFR Awards 2020
3 min read
Tom Revell

RT1 redefined

The insurance Restricted Tier 1 market has been waiting a long time for the entrance of Allianz. The German insurer’s debut finally arrived in November, proving worth the wait as it set new records for the pricing of perpetual contingent capital securities and, on its own, furthered the development of the nascent RT1 product.

While UK, French, Dutch and issuers from the Nordic countries have been issuing RT1 since 2017 to meet their Solvency II requirements, German insurance had been held back by the lack of certainty around the instrument’s tax treatment.

Certainty finally arrived in October in a clarification from the German Federal Ministry of Finance, which Allianz flagged in an announcement while preparing the debut.

Its deal was announced on November 9 when markets were rallying on Joe Biden's US election victory the week before.

Emerging the following day, bookrunners Bank of America, BNP Paribas, Citigroup, Deutsche Bank and HSBC marketed a euro-denominated perpetual non-call 10.4-year tranche with initial price thoughts of the 3.25% area and a US dollar perpetual non-call 5.4-year 144A registered tranche at the 4.25% area.

With demand peaking at €6.25bn and US$9.8bn, a €1.25bn tranche was launched at 2.625% and a US$1.25bn tranche at 3.50%, inside estimates of fair value.

The coupons of both tranches are by a long way the lowest recorded in RT1, surpassing the tightest levels achieved by European banks in the Additional Tier 1 market and breaking through oft-cited psychological pricing barriers of 3% in the euro market and 4% in US dollars.

The levels were inside observers’ expectations, said Damian Saunders, FIG syndicate manager at BNP Paribas.

“The way the lead managers looked at the trade was slightly different,” he said. “We felt Allianz was such a bellwether name, such an important transaction, that there was real price discovery to be done.

“It quickly became apparent investors viewed this as a notch above other peers, so consequently we were able to price a very tight transaction.”

In contrast to the market for AT1 bank capital, the RT1 market has developed slowly, with much of the issuance coming in small volumes from smaller, less frequent issuers and proving relatively illiquid in the secondary market.

But bankers said that in printing the largest RT1 to date and setting a new pricing benchmark, Allianz has on its own pushed the product forward.

“The RT1 market has maybe suffered a bit in relation to the AT1 market because it doesn’t have as diverse a range of issuers nor as many outstanding deals,” said Christoph Hittmair, global head of FIG DCM at HSBC. “For the largest global insurer to set this pricing benchmark is clearly an important step for the further development of this market.”

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