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Capital Markets

BBVA’s tier 1 capital: Trigger unhappy

BBVA’s additional tier 1 capital raising generated an astonishing €9 billion of orders, prompting bankers to proclaim it the opening of a big new market. But the staggering array and complexity of conversion triggers contained in the deal has set off alarm bells among investors.

In early May, Spanish bank BBVA printed a €1.5 billion additional tier 1 (AT1) trade, a transaction that has attracted as much comment in the market for its complexity as for its tight pricing. Despite the fact that the final Capital Requirements Directive rules – and the European Banking Authority technical standards for tier 1 capital – are not due to be published until the end of June, the trade is the first of the new breed of AT1 capital that will emerge from the Basle III regulations.

BBVA’s deal, which was arranged by BBVA, Bank of America Merrill Lynch, Goldman Sachs and UBS, attracted $9.5 billion of orders despite the fact that it carried a dizzying array of triggers for equity conversion. These included a common equity tier 1 ratio of 5.125%, a Spanish capital principal ratio of less than 7%, an EBA core tier 1 ratio of less than 7% and a tier 1 capital ratio of less than 6% following four consecutive quarters of losses. These are high triggers, which convert to equity rather than imposing permanent write-down.

The final publication of the technical standards for hybrid tier 1 instruments will clarify what is needed to achieve loss absorption for non-dilutive instruments (expected to promote write-down/write-up rather than permanent write-down).