While institutional investors in Europe and the US have been slow to get involved in the new-style capital market, yield-hungry private bank investors formed a bedrock of demand through the summer of 2012 and the first months of 2013.
Syndicators would often deny it, but this bid was very important for capital trades — whether plain vanilla tier two or contingent capital — and deals would often involve a discount for private bank buyers, which were seen to give the trade momentum with their inflated orders, sometimes allowing lead managers to tighten pricing more than they would have otherwise been able to.
But the market is evolving. Asian investors are no longer the dominant presence they used to be in tier two, Coco and now additional tier one trades. Some 22% of BBVA’s AT1 bond went to Asian accounts, while Société Générale’s recent temporary write-down deal only saw 9% of Asian distribution — which surprised the issuer somewhat.
Fewer orders from Asia might mean order books aren’t as impressive as they used to be, but overall, it’s no bad thing. Inflated order books can distort the execution and allocation process, and Asian private bank investors are flightier than institutional buyers.
Sure, it might have taken institutional investors longer to start getting comfortable with products like Cocos and AT1 (‘start’ being the operative word, as many of them are yet to decide whether they will buy them), but at least they don’t sell up as soon as the going gets tough.
Coco and AT1 trades that have had high Asian distribution have often performed badly in the past — think Barclays, for example — and if a solid, dependable market is to be built in products like these, it is far better that it has a solid foundation of sophisticated buy-and-hold investors.
That doesn’t mean it’s plain sailing, however. The Basel III and CRD IV agreements might not have intended these products to be too complex, but there’s only so much you can understand by looking at them on paper — it remains to be seen how they will trade in a distressed situation, at what point regulators will intervene and trigger losses, how banks will communicate changes in capital ratios... the list goes on.
Institutional investors are more cautious about this stuff, and quite right too. There is little they can change at this point in terms of shaping the asset class, and at this point, they should be making a call rather than complaining about structures. But those that do buy these instruments aren’t doing so out of a love for subordination.
Just like Asian investors, they’re doing it for the yield. They just happen to be a tad more sophisticated — and issuers must respect that. They must be open and informative with investors, because this is a relationship that needs to endure.