March 2, 2018 / 11:22 AM / 3 months ago

RBS caps profit milestone with monster euro trade

* UK lender raises €4.75bn of debt despite challenging backdrop

* Transaction highlights evolution in funding costs

By Alice Gledhill

LONDON, March 2 (IFR) - Royal Bank of Scotland priced the biggest financial trade in the euro market for more than a decade on Tuesday, raising €4.75bn across three tranches and marking yet another milestone in its turnaround since the crisis.

Other financial trades from Commerzbank, Macquarie Group and even Lloyds have struggled to generate momentum as market conditions slacken, but RBS - once the black sheep of the UK banking sector - had no such problem, generating books of over €6bn.

The bank remains 72% owned by the UK government after receiving a £45.5bn bailout, but has fought hard to put legacy issues behind it via a multi-year restructuring.

“There aren’t many days where that volume is taken from the euro market,” said Scott Forrest, head of debt capital markets and capital strategy at RBS. “We’ve had a good story to tell, about simplifying the bank, and then delivering on that plan.”

A multibillion-dollar misconduct case with the US Department of Justice remains unresolved. It has steadily built capital, however - the group’s Common Equity Tier 1 ratio has jumped to 15.9% from 8.6% in 2013, and it posted its first annual profit in a decade last week.

Moody’s upgraded RBS Group’s long-term senior unsecured rating to Baa3 from Ba1 last year, making it investment-grade at all three major agencies.

That upwards trajectory set the stage for Tuesday’s transaction, allowing the bank to load up on funding and beef up its loss-absorbing buffers in one fell swoop.

It managed that despite choppy conditions in the euro market and the relentless noise around Brexit, and in a pivotal year for UK banks as they embed new ring-fenced entities designed to separate retail and investment banking activities.

The lender’s turnaround is reflected in its credit spreads. A €1.5bn 1.75% eight-year non-call seven tranche from the holdco priced at 100bp over swaps, some 90bp inside where a €1.5bn 2% six-year non-call five came last March. That bond was bid at 55bp over at Tuesday’s open on Tradeweb.

“We’ve been pegged back for a considerable period of time relative to our peers,” said Forrest.

“ trades were priced broadly in line or slightly back of Barclays, but at holdco level they’re rated up to two notches higher than we are, so I think there’s been excellent progress there.” The holdco deal was rated Baa3/BBB-/BBB+.


RBS combined the holdco offering with two tranches - a two-year floater and a four-year fixed - from Royal Bank of Scotland plc, the first time it had sold opco and holdco debt together.

That continued a theme of recent years, when banks have raised short-dated funding from the opco to minimise costs while issuing longer-dated holdco paper to build buffers of loss-absorbing debt that will retain regulatory value for years to come.

The €1.75bn floater priced at three-month Euribor plus 22bp and the €1.5bn fixed at mid-swaps plus 40bp, carving out much of RBS’s £2bn to £4bn annual opco target. The opco bonds have held in better than the holdco tranche, which was bid 9bp wider on Friday as the market sold off.

The amount raised through the opco tranches is a step up from the £1.1bn-equivalent of opco senior it sold in 2017, reflecting changes to the balance sheet due to ring-fencing. It also aims to issue £4bn to £6bn from RBS Group.

Despite concerns this two-pronged approach risked cannibalising demand, Chris Agathangelou, head of financial institutions syndicate at NatWest Markets, said the issuer had chosen very different maturity buckets to mitigate those fears.

“By doing a triple-tranche we wanted to be as open, honest and fair as possible,” he said.

“I think it just gives people a bit of choice, and it’s a much cleaner way to do it than splitting up holdco and opco over two days.”


The RBS transaction continued an active start for the UK banking sector in 2018. It took combined issuance in euros and sterling to more than €15bn-equivalent, including trades from Lloyds and Nationwide this week.

The Bank of England’s Term Funding Scheme - from which UK banks have taken some £115bn - ended last month, shifting the focus back to the wholesale funding market in a year when UK bank spreads could well come under pressure.

“We’re at extremely tight levels on a historic basis, so as an institution it makes sense to get ahead of your funding plan given there are uncertainties ahead,” said Agathangelou.

Still, RBS found plenty of interest, despite misgivings among some investors.

“UK banks are definitely lagging and less-loved, I think mainly because of Brexit concerns,” said Matthew Rees, a portfolio manager at Legal & General Investment Management.

He said the 5bp to 10bp new issue premiums were not enough given the deal’s size and general malaise towards UK banks.

“It’s pretty interesting of the UK banks to all issue within a few days of each other, just as the Brexit negotiations turn detailed.” (Reporting by Alice Gledhill, editing by Sudip Roy, Julian Baker)

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