(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Neil Unmack
LONDON, May 1 (Reuters Breakingviews) - A bank from the euro zone’s debt-challenged periphery has been the first to issue a new breed of loss-absorbing bonds. It is proof that central bank-whipped bondholders, shrugging off the euro crisis, are desperate for yield. A 9 percent coupon looks juicy, but it pays investors less than equity, with no upside.
The new $1.5 billion bond from BBVA (BBVA.MC) is a milestone. It’s the first issued by a European bank to meet Basle III rules for Tier 1 capital. The rules for so-called hybrids were tightened after the 2008 financial crisis. Banks must have full discretion to pay coupons - or not. Bonds must be perpetual, and not include incentive for the bank to repay them early, such as a coupon increase. And if the bank gets into trouble, the bonds must absorb losses - in this case a conversion into equity - once the lender’s capital ratio falls below a pre-set trigger level.
When regulators began setting the rules for new “superhybrids”, observers wondered if bond investors would ever buy them. They now have the answer: over 400 investors placed nearly $10 billion of orders for the BBVA instrument. Other banks will follow. By raising this additional Tier 1, banks can boost capital ratios without diluting shareholders, and deduct interest payments from their tax bill. The deal also allows BBVA to boost its core Tier 1 ratio by 30 basis points, to 11.5 percent, because of a different treatment of deductions made against core Tier 1.
The deal’s success illustrates the brilliance of central bank policy in forcing investors to take risk. Investors are willing to shrug off the euro zone crisis, thanks to Mario Draghi’s promise to, maybe, one day, buy sovereign bonds. And central banks’ willingness to hold rates low and print money is forcing investors to scour for yield. From a bond investors’ perceptive, the coupon of 9 percent is appealing. Spanish government debt is hovering at around 4 percent. The snag is that nothing can stop BBVA from not paying that coupon if the economy sours.
The real winners are BBVA shareholders. Post-tax the deal equates to a cost of equity of about 6 percent, half BBVA’s cost of capital. By buying the bond, investors have shown their confidence that Spain and BBVA in particular, are over the worst. They should have bought BBVA stock. Its return on equity in the first quarter: 16.2 percent.
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- BBVA's inaugural Additional Tier 1 bond got off to a strong start on April 30 as investors piled into the new deal despite a complicated structure that drew criticism from market observers.
- Spain's second largest bank attracted orders in excess of USD9.25bn for its perpetual non-call five-year bond and the coupon was fixed at 9%. The bond will be sized in the USD1.25bn-USD1.5bn range.
- Lead managers BBVA, Bank of America Merrill Lynch, Goldman Sachs and UBS began marketing the deal on Monday at 9.5% area, according to a market source, and this was then revised to 9.25% area during Tuesday's bookbuilding. - For previous columns by the author, Reuters customers can click on [UNMACK/]
(Editing by Pierre Briançon and David Evans)
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