The UK's Co-operative Bank was able to secure tighter pricing than many market participants had expected as it landed a green £200m 10.5-year non-call 5.5 Tier 2 at 11.75% on Tuesday, drawing more than £570m of demand for its first bank capital issuance in over four years.
Co-op last tapped the Tier 2 market in April 2019, when it sold a £200m April 2029 non-call 2024 note at 9.5%. The new issue was launched alongside a tender offer for the old bond as Co-op seeks to replace it ahead of its call date.
The high price Co-op paid for that 9.5% deal – at a time of much lower yields than the present day – reflected the bank's struggles to recover from a turbulent period that brought it close to collapse in the years following the financial crisis. But the bank – now under the ownership of several hedge funds and private equity houses Bain Capital and JC Flowers – has since made substantial progress, having returned to profitability in 2021 and become fully compliant with its capital requirement (including buffers) in 2022.
Co-op still offers a pick-up to most UK peers, however, and the prevailing higher-yield environment meant the new issue would offer a materially higher coupon than 9.5%. The secondary market trading levels of the bank's senior notes clearly indicated the Tier 2 would offer a double-digit coupon. The Co-op's last senior deal, a £200m 9.50% May 2028 non-call 2027 green senior non-preferred priced in May, was trading at 9.90% on Monday.
Indeed, after marketing the deal in a series of investor calls on Monday afternoon, leads Deutsche Bank, Morgan Stanley and NatWest Markets opened books on Tuesday morning with initial price thoughts of 12%–12.125% and the size already set at £200m.
An update some two hours later showed that size was more than twice covered by demand, with the books standing above £450m. Orders continued to come in and the leads launched the deal another hour later at 11.75%, with books above £550m (including £30m of lead interest).
But while the coupon puts Co-op firmly towards the wider end of the sterling Tier 2 market, bankers away from the deal still said its pricing had exceeded their expectations, and a banker close to the deal said it had arguably landed inside fair value.
"Everyone is delighted in terms of the level the issuer was able to achieve versus both their existing MREL securities and against some of the peer comparables," he said.
The banker close to the deal said the result was supported both by the tender offer and an improvement in market conditions in recent weeks.
"They have had the benefit of a strong tailwind in the last couple of weeks in terms of risk appetite for higher-beta products," he said.
The fact that the new issue is expected to be rated Ba3 by Moody's also broadened the range of investors able to participate. The final book stood above £570m, while demand for the unrated 2019 Tier 2 came in at around £235m.
One of the main comparables cited by bankers on and off the deal was OSB Group's £250m 9.993% July 2033 non-call 2028 Tier 2, which was quoted at 11.40%. OSB's deal, issued in April, is rated Baa3, three notches higher than the expected rating of Co-op's Tier 2.
Bankers said Co-op had done well to price so close to OSB, noting that the differential between the two banks' Tier 2s implied by the pricing of the new issue is smaller than that of their senior unsecured bonds in the secondary market. The two banks' MREL-eligible senior notes trade roughly 50bp apart.
"I thought they'd have to come at least one point back [of OSB]," said a banker away from the deal.
The banker close to the deal said that while the senior differential would imply it was priced with a negative concession, the trade demonstrated how pricing can be compressed in such high coupon offerings.
"Co-op is a name that investors continue to see upside and value in going forward and that allowed us to push through where a lot of market participants were expecting," he added.
The deal also landed inside a £90m 10.25-year non-call 5.25 Tier 2 that priced at 12.25% by Shawbrook Group in late September.
The issuing entity of the new Tier 2 is Co-operative Bank Holdings Limited, the holding company of the combined group, which had previously issued its regulatory capital and MREL trades out of Co-operative Bank Finance plc.
Last week, Co-op published a notice of issuer substitution with regards to its outstanding Tier 2 and senior unsecured transactions, moving them across to Co-operative Bank Holdings Limited.