February 12, 2015 / 5:47 PM / 3 years ago

UBS inaugural AT1 CoCo possible for Friday launch

LONDON, Feb 12 (IFR) - A multi-tranche, multi-currency inaugural Additional Tier 1 bond issue for UBS could emerge as early as Friday, according to a source, joining the growing wave of supply in the market.

While the Swiss lender is a veteran of the CoCo Tier 2 market, it will be its first of investor appetite for more deeply subordinated AT1 bond.

One tranche will include a high-trigger total loss bond that could see bondholders wiped out if UBS’s Common Equity Tier 1 ratio falls below 7% - the first AT1 with these features.

Barclays and Credit Agricole have sold total loss high-trigger bonds before, but these were less risky Tier 2 deals.

The AT1 and Tier 2 CoCo markets have grown rapidly over recent years, with issuance reaching US$174bn globally in 2014, according to Moody‘s, far exceeding the previous US$51bn in 2013. This week alone has seen around US$6.5bn equivalent sold to investors.

One banker said that investor mandates are far more flexible on riskier structures compared to the market’s early days. Especially given the prospect of some additional yield.

Also the chance of UBS breaching the trigger is seen as a pretty remote event. Its full-year 2014 results show the bank’s Basel III Common Equity Tier 1 ratio was 13.4%.

“While investors tend to prefer equity conversion for high-trigger CoCos, the buffer and the UBS name should attract a lot of buyers,” a debt capital markets banker said.

“Also, UBS has said that it will pay bonuses with high-trigger AT1, which will align investors’ and employees’ interests and will be a source of discipline!”

UBS will also price one or more tranches with a 5.125% CET1 trigger. Expectations are that these tranches will have a 750m size. The bank is looking at tapping both the euro and US dollar markets.


Also the Swiss bank is bypassing the US domestic market, opting to sell the bond in Reg S format instead.

“European investors are well educated on the asset class and the breadth of understanding of the product in the domestic dollar market is potentially less,” said the first banker. “If you look at who is driving AT1 trades, they are still very much dependent on the European contingent.”

Furthermore, updating the documentation to allow US domestic distribution would taken substantial additional number of weeks.

Demand could be helped by the fact that, unlike European AT1, there is no automatic buffer breach where investors’ coupons are turned off; UBS’s board has to pay AT1 holders their coupons if it wants to pay a shareholder dividend.

“While the new issue pipeline is sizeable, and this may weigh slightly on technicals, our opinion on AT1s has not changed,” wrote Eoin Walsh, partner, portfolio manager at Twenty Four Asset Management.

“On a selective basis, AT1s continue to offer very attractive relative value, especially in light of the spread-tightening in euro government bonds.” (Reporting by Helene Durand; Editing by Philip Wright, Alex Chambers)

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