The AT1 market, which had been the story in FIG DCM all year, ended 2014 with a $5.7 billion bang thanks to Industrial and Commercial Bank of China’s triple-currency trade, which closed on December 3. The eight banks mandated by Bank of China for its $6.5 billion deal back in October (BNP Paribas, China Merchants Securities, Citi, Citic Securities, Credit Suisse, HSBC, Morgan Stanley and Standard Chartered) were precluded from the ICBC issue, which, in addition to ICBC itself, had just three joint bookrunners – BAML, Goldman Sachs and UBS.
From a fee and league table perspective, the ICBC deal was the one to be on.
The deal raised Rmb12 billion ($1.94 billion) and $2.95 billion in five-year tranches and a largely cosmetic seven-year €600 million tranche, all three pricing inside the Bank of China trade at around 6%. The two jumbo trades are just a foretaste of the $25 billion AT1 issuance from the five largest Chinese banks. They have fostered healthy demand from domestic investors – predominantly Chinese insurance companies – for these products that can then be sold into by smaller Chinese issuers.
“It is good to see China’s national champions issuing because that means that investors that have bought these deals may go on to buy deals from other banks,” observes one capital solutions specialist. “Investors in Germany did not buy AT1 until Deutsche Bank brought its inaugural issue, now they buy it.”
However, there is little read-through to Europe from the heavy demand that greeted the two recent Chinese deals as they were so heavily skewed towards Asian buyers. Demand for AT1 in Europe has become far less predictable since September, following a couple of ill-received trades and concern over future supply.
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“One of the key risks to the ATI market is around investor confidence and how that can be impacted by regulatory scrutiny and poor execution, which in itself can lead to very steep backtracking from the market by investors,” says Jeff Tannenbaum, head of DCM origination and syndicate at BAML. He adds that the relative value of AT1 securities versus other markets – particularly high yield and equities – is another risk to the performance of the market.
“There has been some investor fatigue around AT1 as there has been tremendous supply and we have seen some indigestion,” agrees Chris Whitman, head of global risk syndicate at Deutsche Bank. However, this has not discouraged issuers at the riskier end of the spectrum. Having scrapped its planned IPO in October, UK challenger bank Aldermore issued a £75 million perpetual non-call 5.5 year bond with a CET1 trigger of 7% in December that offered a juicy 11.875% yield via Deutsche Bank.
“For Aldermore, the cost of equity is higher than the cost of AT1, and there is a small group of private equity investors that is very willing to buy this risk,” observes one DCM banker away from the deal.
Fellow UK challenger bank Shawbrook (which had also been considering an IPO in 2014) nearly doubled the size of its regulatory capital to £178 million last year via the issuance of a tier-2 bond, which is believed to have been placed with US private equity house CarVal. The latter, along with Pimco and BlueBay, is one of a number of US investors that have set up funds targeting new-style bank capital.
|There has been some investor fatigue around AT1 as there has been tremendous supply and we have seen some indigestion
Chris Whitman, Deutsche Bank
“The AT1 market is expected to see over $200 billion of issuance over the next five years,” says Barry Donlon, head of capital solutions at UBS in London. “The potential return on offer of 7% to 8% has been sufficient to incentivize investors to set up dedicated funds for this.”
Even with the substantial anticipated volumes from Asia, capital markets bankers display confidence that there is sufficient investor appetite to meet AT1 issuance in 2015. The picture could, however, be very different for capital issuance driven by future total loss-absorbing capacity (TLAC) requirements to be imposed by the FSB. “Some investors will be very nervous about what TLAC means for future supply,” says one banker. “There may be friction between what issuers want to issue and what investors are prepared to buy.”
That nervousness isn’t helped by the lack of clarity around the shape and size of this future market.
“Most estimates which I have seen of how much bank capital will need to be raised as a result of TLAC are intrinsically flawed,” says Emil Petrov, head of capital solutions at Nomura. “This is because the recognition of TLAC issued by different entities in a banking group does not follow financial accounting or even regulatory consolidation. It will be based on the individual resolution plans agreed with each bank which, for the time being at least, are not known.”
Many market participants, however, reckon that global issuance could reach $1 trillion, $500 billion of which could come from Europe.