* CGD pays high price for Portugal's first AT1
* Debt sale central to state-owned lender's recap plan
(Adds quotes, detail)
By Alice Gledhill
LONDON, March 23 (IFR) - Caixa Geral de Depositos has
cajoled investors into buying €500m of its most deeply
subordinated debt, a key element in the state-owned bank's recap
plan, but the 10.75% coupon is the highest since the market's
infancy in 2013.
Orders for the perpetual non-call five-year bond, also
Portugal's first Additional Tier 1 sale, have passed €2bn to
more than cover the no-grow €500m target.
That demand enabled leads to tighten initial price thoughts
of 11%-11.5%, but it is still the highest coupon for a benchmark
euro AT1 since a €500m 11.5% deal from Banco Popular Espanol
issued in October 2013.
Pricing power lay firmly in the hands of investors, who know
perfectly well that the issuer has no choice but to get the
"They have a gun to their head, that's why it's so wide,"
said a banker off the deal early on Thursday.
CreditSights analysts saw fair value considerably higher, at
12%. The issuer however was hoping to land around or even inside
10%, according to sources. The bank could not be immediately
reached for comment.
The debt is part of a recapitalisation package agreed with
European authorities to nurse the lender back to health, which
also includes a €2.5bn capital injection from the state and a
further €430m of AT1 issuance.
The bank reported phased-in Common Equity Tier 1 and total
ratios of just 7% and 8.1% respectively as of December 2016,
among the worst in Europe. It is not expected to return to
profitability until 2018.
SWIMMING AGAINST THE TIDE
CGD's investment case is not helped by the broader economic
picture in Portugal, a jurisdiction described as "uninvestible"
by one investor.
Fitch, expected to rate the bond at B-, has a negative
outlook on the country's banking sector, reflecting intensified
pressure on capital from weak profitability and asset quality
amid a highly indebted economy with low growth prospects.
The shock transfer of senior bonds in late 2015 from
state-rescued Novo Banco to Banco Espirito Santo, which left
bondholders nursing severe losses, also continues to cast a
shadow over the sector and provided investors with further
Added to that, market access for Portuguese banks had been
completely untested since 2015, even in a covered format -
considered the safest type of bank debt.
"They are tied to make this deal a success and investors
have taken this into account," said a second investor.
"They are also unfortunately paying up for the erratic
approach to resolution by the Portuguese authorities in 2014 and
TAKING A GAMBLE
Rating agency DBRS this week voiced concerns around the
challenges facing CGD's strategic plan for 2017 to 2020,
particularly the targeted reduction of NPLs and return to
sustainable profitability in 2018.
It warned that a high additional funding cost for AT1
capital "could add to CGD's burden in returning to sustainable
profits, particularly considering the bank's weak earnings
generation and net losses for the sixth consecutive year."
Yet despite those reservations, parts of the buyside clearly
buy into the turnaround story. The issuer met around 120
investors during a recent roadshow.
"It's a very binary investment," said a second banker from
"You're either going to be a hero or an absolute buffoon. If
you get it right, it'll rally really significantly, but if
anything goes wrong with Portugal it will be wiped out."
The bonds will be written down on a temporary basis should
the bank's Common Equity Tier 1 ratio fall below 5.125%.
The deal is expected to price later today via joint leads
managers Barclays, Caixa - Banco de Investimento, Citigroup,
Deutsche Bank and JP Morgan.
(Reporting by Alice Gledhill, Editing by Helene Durand, Julian