* Tier 2 volumes surge as issuers grow tired of waiting
* Sustainable CoCo mkt uncertain despite Asia, Swiss demand
* Hedge funds "carried" capital mkt but real money returning
By Natalie Harrison
LONDON, Nov 22 (IFR) - European banks will probably refrain
from issuing new Tier 1 debt until there is more regulatory
clarity on the securities, but Tier 2 volumes may accelerate due
to redemption pressures, bankers said at IFR's 2012 Bank Capital
Conference on Thursday.
Tier 2 volumes have already increased in the second half of
this year following a surge in risk appetite on the back of ECB
President Mario Draghi's promise to hold down the borrowing
costs of battered eurozone sovereigns.
Issuance prospects for 2013 will largely be dictated by
banks' capital needs, but bankers said redemptions amounting to
around EUR50bn will also be a factor.
Tier 1 flows, in comparison, will remain limited, bankers
and issuers agreed.
"Few people are prepared to press the button, but it will
come at a later stage," said Olivier de Lamarliere, FIG DCM at
Bank of America Merrill Lynch.
Alain Stangroome, head of capital planning at HSBC, said the
problem that issuers faced was the risk of issuing securities
that carried uncertainties, which ultimately was not good for
Stangroome said that Barclays' CoCo was an interesting
structure, but not one that HSBC was enamoured with. He was also
sceptical about Tier 1 instruments.
"We're likely to see more Tier 2, but Additional Tier 1 is
tough in Europe. We may have to live with it in the future, but
until Additional Tier 1 is defined in CRD4, we would like to
keep our power dry," he added.
Barry Donlon, head of capital and corporate syndicate at
UBS, said the danger was setting precedents on new structures
that would be difficult for others to emulate. Barclays' CoCo,
for example, included complex features that would be difficult
for other banks to copy, he said.
"Although we're seeing strong demand in Asia and
Switzerland, we really need to make sure we are developing a
sustainable market going forward," said Donlon.
Oliver Sedgwick, head of FIG syndicate at Goldman Sachs,
said Tier 1 could pick up, although the instruments would have
to include flexibility, while the pricing of such deals was also
an area of difficulty.
He referenced Banco do Brasil's hybrid Tier 1 securities,
which are trading at more favourable levels than their Western
"Assuming that the current positivity in the market
continues, we could see more of those types of deals," added
Getting issuers more comfortable with issuing subordinated
debt will first have to come from regulatory clarity, a theme
that ran throughout all panel discussions at the conference.
"The starting point is the treatment from regulators, but
then you have to start thinking about cost, and whether
instruments are going to be cheaper than equity, and also about
the tax implication, especially for Tier 1," said Andy Young,
head of FIG syndicate at Credit Suisse.
With examples of both low- and high-trigger CoCos now
established, the next step in the market was potentially a
perpetual high-trigger issue, added Young.
The ability to make that leap, however, will also depend on
the investor base. Donlon at UBS said that if deals are
structured correctly, there is a good institutional bid, adding
that there were significantly more institutional investors that
participated in the Swiss bank's second low trigger CoCo, a
USD2bn 10-year bullet Tier 2 priced in August.
"The hedge fund community in London has carried the bank
capital market for the past two to three years, but the real
money community is coming back in. We're in quite a good place
for having different investors interested in different
securities," said Donlon.
BAML's Lamarliere said the transition from high/low trigger
Tier 2 securities to perpetuals with no step-up would be a
"It should be possible if the price is right, but needs to
be managed properly," he said.
Young, meanwhile, said that it was encouraging that
peripheral issuers were back in the market, pointing to
UniCredit's recent 10-year Lower Tier 2.
"At the very least, it's encouraging that peripheral
national champions have access. As long as markets stay as they
are, there's no reason we shouldn't see the basis between the
core and peripheral narrow," said Young.
(Reporting by Natalie Harrison, IFR Markets; editing by Helene