Abrdn is set to pioneer a new class of Additional Tier 1 capital this week having unveiled plans for a sub-benchmark sterling-denominated AT1 – a first from an asset management company.
Abrdn, which changed its name from Standard Life Aberdeen earlier this year, announced the mandate on Thursday, the same day as confirming it will buy online investment platform, interactive investor, for £1.49bn.
Abrdn said the acquisition, which will be funded by available cash from its capital reserves, will increase its assets under management fivefold to £69bn and more than double its revenue to £199m.
The AT1 is aimed at optimising abrdn's capital for new Investment Firms Prudential Regime (IFPR) rules that will apply from January 1 2022. While abrdn's Tier 2 bucket is already filled, it has scope for around £200m of the total capital requirement to be met by AT1.
Following the acquisition of interactive investor and the AT1 issuance, abrdn projects it will have a pro forma regulatory capital surplus (post-IFPR) of around £500m.
The UK-based company mandated Barclays, Bank of America, HSBC and JP Morgan to arrange investor calls that began on Thursday to market the perpetual non-call 5.5-year transaction. It is expected to be sized at £200m and is set to be launched early this week.
Bankers said the timing of the deal was not ideal, coming after substantial volatility in Tier 1 products and with year-end in sight. But some cited reasons for optimism in the secondary market, with AT1s having tightened as some buyers took opportunities to add after the recent repricing.
"You can argue this doesn't suit the market, but look at the deals from Banco Sabadell and Deutsche Bank [last month] . . . which came when Tier 1 was under pressure but paid reasonable resets and went well," said a lead banker.
"It's sub-benchmark, yes, but it has rarity value, it's a well-known name [with] a scalable acquisition, and arguably a smaller transaction size is not that rare in sterling."
A second lead banker said the issuer was keen to wrap up the deal with the M&A move and have it on balance sheet by year-end.
"They are also an asset manager and have got the view that assets are priced close to the tights in terms of AT1 – while we have sold off recently – and AT1 could be wider by March, for example," he said.
A broadening landscape
Market participants pointed to some advantageous features of the deal versus traditional AT1s. Unlike with bank bonds, there are no maximum distributable amount restrictions applicable and the deal does not feature statutory point of non-viability loss absorption.
The equity conversion trigger will first be set at 7% of RWAs, but will switch to 70% of the own funds requirement under IFPR, translating to a buffer of around £900m.
Despite its advantages, the deal is expected to offer some pick-up versus sterling AT1s from top tier UK banks. Bankers expect the deal to price somewhere between the sterling AT1s of established UK bank issuers in the high 4s and deals from rarer bank issuers such as OSB Group, whose £150m perpetual non-call 2027s are bid at around 6%.
An investor suggested the pioneering transaction could be the first step in an expansion of the AT1 universe beyond the typical set of bank issuers.
"It is interesting in terms of the broadening landscape with not only asset managers coming to the AT1 market but also potentially more challenger banks or fintech companies," he said.
"Will the investment universe broaden in terms of these new types of issuers coming to the market, will that present further opportunity in this space? It’s quite early days but there is potential there for some alpha generation or some ability to capture some decent performance from this new segment."
The deal is expected to be rated Baa2/BBB– by Moody's/Fitch.
Fitch noted the deal is expected to be rated three notches below abrdn's issuer rating of A–, a narrower notching than for most bank AT1s it rates because the agency considers the possibility of mandatory interest cancellation to be more remote than for banks.