April 24, 2015 / 3:42 PM / 2 years ago

Capital trades will choke unless they cough up on price

4 Min Read

LONDON, April 24 (IFR) - Pricing will be crucial for a wave of new bank capital deals as investors force issuers to pay up on trickier names, particularly against a choppier market backdrop.

Tier 2 trades from Ibercaja Banco and Banco Popolare Societa Cooperativa were pencilled in for potential execution this week, but neither emerged as broader volatility around Greece kept a lid on higher beta trades. Permanent TSB's Additional Tier 1 bond, also anticipated this week, is now touted for Monday.

Some thought the issuers had been caught out on timing, with a cooling market leading to some investor inertia. Added to that, national champion Intesa was forced to downsize a 10-year Tier 2 deal from EUR750m to EUR500m last week amid tough conditions.

"Investors will consider the uncertainties and review the areas that may be most affected - and obviously you end up with the periphery and the sub space in financials," said Jens Vanbrabant, head of investment grade credit at ECM Asset Management.

But the market generally still believes that these deals can get done - even if at a cost.

"There is pretty much a price for everything. It's not a question of not getting the deal done, it's how much you pay," said Laurent Frings, co-head of EMEA credit research at Aberdeen Asset Management.

A syndicate banker agreed: "Three years ago, these names didn't have access. They do now, but they'll have to pay - possibly at an egregious price."

One banker suggested the FIG market could learn a lesson from high-yield, where issuers are finding appetite for riskier names.

"Those high-yield trades are getting done but not 10bp back of fair value which is probably where some of those FIG trades were pitched. It is all about price, especially as the current uncertainty is impacting FIG more than anything else."

Positive Attitude Required

Market participants reiterated that there is a buyer base for these banks, particularly among the high yield and hedge fund communities, but that investors needed to have the right mindset.

"This is not an easy trade," said a DCM banker commenting on the proposed AT1 bond from Permanent TSB, which will be the first trade of its type from an Irish bank.

While Ireland's banking system has staged an impressive turnaround since suffering badly in the crisis, investor feedback on Friday pointed to a lofty 9% yield level.

"If they are in a constructive frame of mind and looking for higher beta stuff, then it will work. However, the current backdrop means that investors are very much in a glass-empty frame of mind," the DCM banker continued.

A lead on the mandate from Italian lender Banco Popolare Societa Cooperativa was confident that sufficient depth of demand would come from investors who see value in the name versus the national champions.

"This is very much a play on the bank. Popolare is a top player in its market and that jurisdiction. It will come at a decent spread and those who buy it are very much playing the compression game."

But investors may demand punishing premiums away from the periphery too. Germany's NordLB is hoping to print an inaugural USD Reg S AT1 following a roadshow in the coming week, but an investor sounded a note of caution.

The bonds can be temporarily written down if NordLB's Common Equity Tier 1 ratio falls below 5.125%. The financial institution had a 10.7% CET1 at the end of 2014.

"It will be very interesting. The German banking system has struggled for a long time, but the regulator and the sovereign are willing to support the system so the market gives it this credential and signs off on everything. Do you really want to be buying the most equity-like structure where you have question marks going forward?"

NordLB successfully passed 2014's ECB stress test and had a 8.77% CET1 ration in the adverse scenario. (Reporting by Alice Gledhill, editing by Julian Baker, Helene Durand)

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