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Spanish sub bonds return after Popular blow-up
July 7, 2017 / 2:44 PM / 5 months ago

Spanish sub bonds return after Popular blow-up

LONDON, July 7 (IFR) - Bankia and CaixaBank sold a combined €1.75bn of subordinated debt less than a month after similar securities were torched at Banco Popular, in a clear sign of the market’s maturity.

State-owned Bankia achieved the lowest ever coupon for a Spanish public Additional Tier 1 bond sale, the riskiest debt that banks can issue, beating national champions Santander and BBVA. The €750m no-grow perpetual non-call five-year (rated B+ by S&P), its inaugural AT1, priced at 6%.

It was the week’s second Spanish subordinated deal after CaixaBank’s €1bn 2.75% 11-year non-call six Tier 2 (Ba2/BB+/BBB-/BBB), which drew €2.2bn from 225 investors and priced 100bp inside the €1bn 3.5% 10NC5 Tier 2 it sold in February.

“The market is continuing as if never happened,” said one investor.

Spanish bank bonds broadly held steady in the aftermath of Popular’s resolution in June, but this week’s deals have now proved that the primary market remains wide open for the country’s lenders.

Furthermore, there was little evidence that investors forced either issuer to pay up despite recent events, with CaixaBank pricing roughly flat to fair value and Bankia arguably at least 25bp through.

That said, Bankia’s orderbook dropped from €3.5bn-plus to €2.5bn-plus (pre-reconciliation) as investors bristled at the 50bp move from 6.5% area initial price thoughts.

Presumably as a result, Bankia’s new bonds slipped quite dramatically and were some 14bp wider by Friday afternoon. CaixaBank’s new bonds on the other hand were bid 2bp tighter.

The sector also proved impervious to the collapse of two Italian lenders and the first case of AT1 coupon cancellation (at Bremer Landesbank).

“Popular was an isolated case and rather well flagged,” said Gildas Surry, a partner at Axiom Alternative Investments.

“Caixabank is in a very different position with a strong commercial franchise in Spain. The risk we see in such a transaction is ... around the potential referendum in Catalonia in the autumn.”

TRADING PLACES

While banks’ market access clearly remains intact, Popular has fuelled debate around the relative pricing of sub debt after its Tier 2 bonds were wiped out alongside more deeply subordinated AT1s.

“The scars should be in the Tier 2 space, but CaixaBank did very well,” said Barry Donlon, head of capital solutions at UBS.

“The consensus is that we shouldn’t see any negative impact on Tier 1 yields as the market view is that it is correctly priced for the risk. However, for Tier 2, some investors have speculated that we would see a sell-off, but that hasn’t been the case.”

Though some investors sold out their Tier 2 positions, those bonds were all sold into willing buyers without too much impact on market levels, Donlon added.

Notable re-pricing has been limited to the likes of Liberbank and Cajamar - Liberbank’s €300m 6.875% 10NC5 is bid in the low 90s, for example, tumbling from 105.

While Popular has highlighted the potential losses borne by Tier 2, others suggest that it is perhaps AT1 that should trade tighter.

“It’s not generic though,” said Steve Hussey, head of financial institutions credit research at AllianceBernstein.

“You should evaluate on a case-by-case basis in terms of assessment of the underlying credit fundamentals and the sizes of the relative tranches across the capital structure.”

FORCED HAND

Supply and demand dynamics will also continue to provide support for AT1 and Tier 2 debt.

After almost €10bn of euro AT1 issuance this year, supply is expected to remain fairly muted. At 5.26% the Bank of America Merrill Lynch CoCo index is only just wide of the year’s tights, having rallied from 6.14% at the start of the year, and observers reckon there is room for further compression.

The same is true for Tier 2, particularly given the growth of senior non-preferred debt as the most cost-effective route to building regulatory buffers is also likely to weigh on supply, supporting valuations.

Furthermore, with some investors unable to buy AT1 bonds because of mandate restrictions, Tier 2 is the highest yielding paper available to them, particularly with most other asset classes now bid at historically tight levels.

“It’s a seller’s market,” said Keval Shah, head of bond syndicate at Lloyds Bank.

“It’s clear with the cash currently at hand investors are having to buy primary. If they choose to sit out on relative value concerns, there are plenty of others who are willing to take up the slack.”

Citigroup and Morgan Stanley were structuring advisers and global coordinators on Bankia. They were also joint leads alongside Bankia, Bank of America Merrill Lynch, Goldman Sachs and UBS.

Barclays, BNP Paribas, CaixaBank, Credit Agricole and JP Morgan were leads for CaixaBank.

Reporting by Alice Gledhill, editing by Helene Durand and Matthew Davies

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