November 23, 2017 / 2:06 PM / a year ago

Nordea reboots AT1 asset class with record coupon

LONDON, Nov 23 (IFR) - Nordea Bank proved just how low investors are willing to go after selling a €750m 3.5% perp NC2025 Additional Tier 1 bond on Tuesday, the lowest coupon achieved in the sector by any European bank.

AT1, the most deeply subordinated form of bank debt, has been central to lenders’ efforts to raise billions in loss-absorbing capacity in a drive to safeguard the system in the next crisis.

The deal has once again left the market reassessing the price floor that many believed had already been reached, coming less than six months on from the first losses for the asset class when Banco Popular was resolved in June.

Despite pricing some 125bp through the next lowest euro AT1 coupons, the deal pulled in more than €5bn of orders from over 380 investors and was trading up around 100.5 on Thursday.

“It’s highly unusual to see a larger bank having equity-like capital issued at a cost of 3.5%,” said Michael Huenseler, head of credit portfolio management at Assenagon Asset Management.

“There is a huge of incentive for those banks that can issue at that low level to fill up the AT1 bucket.”

Nordea was a prime candidate to claim this record. It is one of Europe’s best capitalised banks with a 19.2% CET1 ratio, while its AT1 debt has rare investment-grade ratings - BBB by both S&P and Fitch.

“It’s really hard to see what could stress the bank to such an amount that it would touch the AT1,” said Huenseler.

“The bottom line is, this is a rock-solid bank with very little risk, and therefore 3.5% looks very low in the first place but decent by every competitive measure.”


Despite touching historic tights, the AT1 sector still looks attractive on a relative value basis, putting European junk debt - having recently breached the 2% yield barrier - in the shade.

The yield also offered a considerable pick-up versus Nordea’s Tier 2 debt - a €1bn 1% 2021 NC2026 (Baa1/A-/A+) is bid at just 66bp over swaps compared to the 300.3bp spread at reoffer on the AT1. Those factors help explain why there was limited price sensitivity in the book despite a move of 50bp-75bp from the 4%-4.25% IPT range.

On the other hand, this latest milestone may precipitate a shift in the way the asset class is traded.

“The gates are opening in terms of people starting to think more about relativity on a spread basis versus Tier 2 rather than an absolute yield consideration,” said Ed Mulderrig, a syndicate manager at UBS and a lead on the deal.

“It will be interesting to see the evolution of that as it’s going to be the determinant of whether you get further compression in the asset class or not.”

Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and Nordea were joint books alongside UBS.


With European banks estimated to be more two-thirds through their overall AT1 issuance, based on current requirements, rarity value also plays into the hands of issuers.

Though its first AT1 in euros, Nordea itself is done for the time being. The bank does not expect to return in the near term without regulatory changes or balance sheet development, but may consider further issuance when existing trades roll off.

Nordea had made public plans for AT1 issuance in 2017, though it had to navigate around its decision to shift headquarters to Finland in the hope that being headquartered within the EU’s banking union would place it on a level playing field with peers.

The AT1 emerged just a day after announcing the results of a consent solicitation, which targeted 14 tranches of capital instruments to facilitate technical amendments given the planned domicile change.

Whether other AT1 issuance follows before year-end remains to be seen, though time is running out. Nordea however succeeded in reinvigorating the asset class after a brief recent sell-off, particularly after the last euro benchmarks from ABN AMRO and Santander failed to galvanise investors in the same way.

“I thought it was just very impressive given the market backdrop over the course of the past 10 days or so, which has been anything but perfect,” said Mulderrig from UBS.

“For Nordea to print the lowest ever euro AT1 coupon, at this time of year, with that backdrop and get that reception, is exceptional.” (Reporting by Alice Gledhill, editing by Helene Durand, Julian Baker)

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