(Adds quotes, deal updates)
By Alice Gledhill
LONDON, July 6 (IFR) - Bankia is set to price its inaugural Additional Tier 1 bond through fair value, proving the market is wide open for Spanish lenders despite sub debt investors at Banco Popular being wiped out only last month.
Leads on the €750m no-grow perpetual non-call five-year slashed initial talk of 6.5% area to 6%-6.125% on books of over €3.5bn. Pricing is expected later today.
That move was likely to see some orders fall away - one investor pegged fair value at 6.5% - but a lead said it would not impact the success of the trade.
"Given the level of oversubscription and the performance of Bankia's last few trades, they're right to test at the tightest possible level. It is incredible, the result they're achieving."
Bankia's last subordinated offering, a €500m 3.375% 10NC5 Tier 2 in March, was a blowout. It was bid at swaps plus 271bp last Friday, according to Thomson Reuters data, some 64bp inside its 335bp reoffer level.
The response provides yet further evidence of investors' willingness to isolate losses imposed on failed lender Banco Popular in June. It is the second capital trade from a Spanish lender this week, after CaixaBank's €1bn 11NC6 Tier 2 drew €2.2bn in orders on Wednesday despite a minimal concession.
"It's a seller's market," said a second banker.
"With that in mind, it's clear that you don't have optionality when you're an investor. If you choose to sit out, there are plenty of other people who will take up the slack, unless you are a real off-the-run credit."
Bankia could also take heart from the reception for last week's AT1 deals from HSBC and Raiffeisen Bank International, the first banks to sell AT1 since Banco Popular's resolution. The market has also proved impervious to the collapse of two Italian lenders and the first case of AT1 coupon cancellation, at Bremer Landesbank.
"The underlying technicals are super strong and the AT1 market is now at such a stage of maturity that, even with a resolution and coupon cancellation, it charges on," said a third banker.
Despite AT1's loss-absorbing characteristics, Scope Ratings said in a note last week that actual losses depend to a far larger degree on credit fundamentals and warned against extrapolating losses at Popular and Bremer to all AT1 securities.
Bankia, which last week agreed to acquire Spanish regional lender Banco Mare Nostrum, stacks up well against its peer group in this respect. The joint entity is expected to report a fully loaded CET1 ratio of 12% by year-end, compared with BBVA's 11%, for example.
"In 2012 received state aid, transferred a large stock of bad assets to the state created vehicle SAREB, and wiped out sub debt, but now its recovery story looks well entrenched," CreditSights analysts wrote.
The bond, which is expected to be rated B+ by S&P, will convert to equity if Bankia's Common Equity Tier 1 ratio breaches 5.125%.
Citigroup and Morgan Stanley are structuring advisers and global coordinators. They are also joint leads alongside Bankia, Bank of America Merrill Lynch, Goldman Sachs and UBS.
Reporting by Alice Gledhill, editing by Julian Baker