Swedbank debuts as Nordics hit finely-poised AT1 en masse

Danske and Swedbank this week hit a hectic Additional Tier 1 (AT1) market and Handelsbanken and Nykredit Realkredit mandated debuts in spite of some weakness in the hybrid asset class, while DNB today (Friday) stuck to its domestic market for its first AT1.

The week’s supply — which also took in deals from Spain’s BBVA and UBS of Switzerland — marks the first big wave of AT1 issuance this year, after Rabobank launched the first Dutch AT1 last month. It comes after many banks, including those in the Nordics, announced their 2014 results.

BBVA kicked off the activity on Tuesday — after fellow Spaniard Banco Popular Español on Thursday of last week (5 February) finally sold a long-planned, Eu750m AT1, albeit as a club deal. BBVA sold Eu1.5bn of perpetual non-call five securities with a coupon of 6.75%.

However, as Danske Bank was proceeding to launch a Eu750m perpetual non-call seven AT1 on Wednesday the market softened, with BBVA’s issue trading below par, although Danske and then Swedbank on Thursday were able to get their transactions away successfully.

“In general, the tone in the AT1 or Tier 2 subordinated market continues to be very constructive, particularly for top tier, debut issuers,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “The market continue to be driven by the extraordinary liquidity situation rather than fundamentals.

“I just fear that investors are likely to use the knowledge of a surge in supply to demand higher premiums, particularly for repeat borrowers looking for big size. As expected, volumes are huge and windows are limited, so competition amongst issuers is high and the first movers are gaining a strong advantage.”

Swedbank had announced its inaugural AT1 issue at the end of last week and held a three day roadshow from Monday to Wednesday before leads BAML, BNP Paribas, HSBC, JP Morgan and SG went out with the dollar perpetual non-call five transaction on Thursday morning.

“Despite the slightly softer market tone and large amounts of anticipated supply, we received phenomenal investor interest from the outset, with initial price thoughts of 5.75% for a size of $500m-$750m,” said a banker at one of the leads.

After orders quickly reached more than $2bn guidance was set at 5.5%-5.625% and a $750m was ultimately priced at 5.5% on the back of a $2.5bn book comprising over 200 accounts.

“There was minimal pricing sensitivity in when final terms were set at $750m at 5.5%,” said the lead banker, “offering only a very modest new issue premium, which stands in stark contrast to recent AT1 issues that paid concessions in the region of 30bp-50bp. The deal traded up to 100.50 on the break, demonstrating investors’ ongoing support for the issue in the secondary market.”

He cited a strong capital and earnings generation story coupled with investment grade ratings as reasons behind the deal’s success.

Unlike other Nordic AT1 issuance, Swedbank’s instrument included equity conversion rather than temporary write-down language.

“The equity conversion feedback was very positive and was considered as a cleaner structure and more favourable to investors,” said another lead banker. “Swedbank’s mechanism was by some considered to be worth approximately 25bp in terms of spread reduction relative to peers.”

He added that the level achieved by Swedbank was well through the secondaries of Nordea and SEB, which were the first two Swedish banks to issue AT1.

Swedbank CFO Göran Bronner said the issuer was very satisfied with the deal.

“Despite a turbulent market we successfully achieved a price at the same level as the lowest in the market for equivalent instruments,” he said. “This demonstrates Swedbank´s strong position and high confidence in the investor community.”

Swedbank said that the deal was launched to optimising the bank’s capital structure and fulfils new European capital regulations that aim to avoid taxpayers having to support banks in stressed situations. The banks’ Tier 1 capital ratio was strengthened by 1.5% to 24%, as per 31 December 2014, according to Swedbank, which said it will not issue again until the end of 2017.

Danske launched its new AT1 issue after having reported its 2014 results on Tuesday of last week (3 February), and Peter Holm, senior vice president, group treasury, said that the bank had been planning internally to issue after the results and it announced its plans on Monday.

“We then saw several other issuers with the same idea and so there was a little bit more traffic than we had perhaps anticipated,” he said. “But we listened to our leads and stood by our initial plan.

“Since we had been on the road in Europe last year we thought that it was unnecessary to do so again, but rather hold a global conference call with investors and some one-on-ones the day before launch. We had some 80 participants on the call and this proved to be the right strategy. There were relatively few questions from the investor community about what we were doing and the instrument we were issuing, so they were well aware of our particular product.”

On Wednesday morning leads BNP Paribas, Credit Suisse, Danske, JP Morgan and SG went out with initial price thoughts of the 6% area and, in spite of a weaker market backdrop of underperforming recent supply, by noon had taken indications of interest of over Eu2bn, according to a syndicate official at Danske. The books were then opened with guidance of 5.875% plus or minus 0.125%, and an hour later a final coupon of 5.875% was set for a targeted Eu750m issue size. The syndicate official said that some 200 investors were involved.

“The overall placement was very granular across diverse jurisdictions and investor types as a testimony to the widespread name recognition of Danske Bank,” he said.

Holm nevertheless noted how the book size contrasted with that of its inaugural AT1 in March 2014 — a Eu750m perpetual non-call six issue that was the first Nordic AT1 — and said that this reflected the way the market has changed in the interim.

“When we went out at that time there were not many issuers able to tap the market, but there was a lot of interest in the product and we had a tremendously large book of close to Eu13bn, with some 700 investors,” he said. “Since then we have seen what I would call a normalisation of the market.

“Particularly in the latter part of last year there were some hiccups in the market and, although the market recovered somewhat in January, we have not seen these huge order books that we saw at the beginning of 2014. We ended up with a little over Eu2bn this time, but we had the right investors in the deal for the right size and the right price, and overall we got a good result.”

Alongside its results, Danske announced an increased dividend of Dkr5.5 per share and a Dkr5bn share buyback for 2015. It has also announced it will be calling a Eu700m Tier 2 issue in March.

“We have been adjusting to the new regime for capital instruments under CRR/CRD IV and this issue continues that process,” said Holm. “The starting point is that we have a very strong capital position and in issuing the new Eu750m AT1 and repaying the Eu700m of Tier 2 we are increasing the quality of our capital base — although it should also be seen in the context of the share buyback.”

Handelsbanken has meanwhile mandated Deutsche, Goldman Sachs, JP Morgan and SG as joint lead managers for an inaugural AT1 issue, a US dollar temporary write-down instrument with expected Baa3/BBB/BBB ratings. Launch is expected after a roadshow starting on Monday.

Nykredit Realkredit is also readying its AT1 debut, which will be launched in euros via BAML, Citi, HSBC and Nykredit Markets. At the same time, it is redeeming Eu900m of outstanding hybrid Tier 1.

“The redemption and new issue are part of Nykredit’s efforts to align its capital structure to European and national capital requirements for banks,” it said.

And DNB today sold its first AT1 issue, in its domestic, Norwegian krone market, a Nkr2.15bn (Eu247m) perpetual non-call five issue paying three month Nibor plus 325bp. The bank said that the transaction was very well received.