When Dutch bank ABN Amro issued a S$1 billion ($814 million) tier 2 bond last October the astounding S$17 billion order book it attracted sent a clear message to other eurozone lenders – there is strong Asian appetite for European subordinated bank risk. Whether or not that appetite would stretch to lenders from the periphery was made clear in January when Italian lender UniCredit issued a S$300 million 10.5 non-call 5.5 year tier 2 bond – its first foray into the Asian bond markets. The oversubscription was not quite so eye-catching at S$475 million but the deal shows the extent to which attitudes have changed over the past 12 months.
"This deal would not have been nearly as successful a year ago," Chris Agathangelou, head of financial debt syndicate, EMEA at Nomura in London, tells Euromoney. "Asian investors are very selective in what they buy, and are now reasonably comfortable with the European story but only for national champions. Fifteen to 20 European names now have very good access to this space."
With other Singapore dollar issuers such as DBS and Standard Chartered offering around 2%, and a domestic deposit rate of 3%, the attraction of a an instrument yielding 5.5% from UniCredit is clear. "The senior/subordinated multiple is very small for many Asian banks so investors look to eurozone banks for yield," says Agathangelou. Two-thirds of the deal was sold to non-European accounts, with 76% going to private banks.
But in perhaps the most striking example of the scale of investor appetite for subordinated bank paper from the eurozone periphery, the Irish government attracted some €5 billion of investor orders for the secondary sale of €1 billion of Bank of Ireland (BoI) 2016 convertible contingent capital bonds, demand undoubtedly provoked by the bonds offering a juicy 10% coupon and the fact that it was stamp duty exempt as the notes were being admitted to a clearing system for the first time.
BoI has form here. In December the bank sold €250 million of 10-year lower tier 2 bonds – its first subordinated bond issue since 2008 – offering the same 10% coupon. "We know the financial market has a short memory, but even by its standards the rapid rehabilitation of Bank of Ireland has been remarkable," says Simon Adamson of CreditSights. "The apparently strong demand for a risky instrument from a recently bailed-out bank in which subordinated and hybrid bondholders took large losses shows the extent to which market sentiment has improved in recent weeks." The sale, which was coordinated by Davy Capital Markets, Deutsche Bank and UBS, was upped from €500 million during book building. Twenty six percent of the issue went to hedge funds, 11% to private banks and the remainder to managed funds.
It is certainly a good deal for the Irish government, enabling the bank to part repay some of the capital the state injected in 2011, but "we are less convinced that this is a good deal for investors," says Adamson.
After all, BoI’s CoCo bonds convert into ordinary shares if its Basle II core tier 1 or Basle III common equity tier 1 ratio falls below 8.25% – which is very high, and particularly when compared with the 7% conversion trigger on Barclays’ recent tier 2 CoCo. This is the first time a European bank bailout instrument has been marketed to investors in a secondary sale, and could mark the first stage in European governments seeking to exit stakes in national banks.
Riskier than equity
As Euromoney went to press, Belgian banking and insurance group KBC Bank was in the market roadshowing a €1 billion contingent convertible, the proceeds of which would help it partly pay off €7 billion of bailout funds from the Belgian and Flemish governments. This deal is structured as a 10 non-call 5 tier 2 issuance with a 7% CET1 trigger for full and permanent write-down. Adamson at CreditSights is similarly circumspect on the attraction for investors of this latest contingent convertible offering.
"This looks like an old-style lower tier 2 note but with a full and permanent write-down to zero if the bank’s CET1 ratio falls below 7%," he says. "We do not like the structure of these contingent capital notes. A write-down rather than a conversion to equity is probably easier to sell to fixed-income investors, as many are not allowed to hold equity, but it means that investors do not get the potential upside from being converted into shares. In other words, these notes, in some respects, carry a higher risk than an equity investment." The deal is expected to carry a coupon of around 8%.
Peripheral issuers will now be lining up to tap into this sentiment, conscious of how quickly the tide can turn in these markets. "If this environment continues for weeks and months we will see a steady chipping away at spreads," says Derek Hynes, lead portfolio manager at ECM in London. "There will be a saturation point. We have yet to see it in peripheral financials but it will come."