FIG issuers had a storming start to 2015 as ECB cash flooded risk assets. But a sharp sell-off in Bunds, the Greek debt crisis, Chinese growth concerns and US rates obsession were just some of the issues that made FIG a window-driven market from April onwards.
Just seven of 31 euro additional tier one tranches finished 2015 trading tighter than where they started — and the track record in tier two was not much better.
Here GlobalCapital rewards two capital trades that got done, and got done extremely well in a year littered with obstacles.
Additional Tier One Capital Deal of the Year
Royal Bank of Scotland
$2bn 7.5% perpetual non-call 2020
$1.15bn 8% perpetual non-call 2025
Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley, Royal Bank of Scotland
The painful restructuring of Royal Bank of Scotland was given resounding approval by international investors in August, as they threw $26bn of orders at its first additional tier one capital issue.
There was no shortage of stellar contenders for this award. Svenska Handelsbanken proved it was in a league of its own among European credits with the product’s lowest ever coupon in February, Santander UK stormed into the sterling market in June and RBS’s mammoth order book had to battle past the $22bn mark Standard Chartered set in March to achieve its record-breaking total.
But RBS’s $3.15bn debut deserves recognition for helping to relaunch the rescued lender as a globally in-demand credit in the capital markets. It came on August 5, just two days after a much hyped £2bn block trade that reduced the UK government’s shareholding to 74.6%.
Lead managers Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley and Royal Bank of Scotland ultimately printed a $2bn perpetual non-call five year and a $1.15bn perpetual non-call 10 year — both of which convert to ordinary shares if common equity tier one capital dips below a 7% ratio. Coupons were 7.5% and 8%, respectively.
RBS had been flagging the trade to investors since February, telling them it needed £2bn-equivalent of AT1 and asking whether they wanted it in two transactions or all in one go.
The overwhelming response, according to the lead managers, was for one deal, with investors eager for bigger allocations to gain extra exposure to the issuer’s improving credit story.
Rival bankers described the deal as a turning point for RBS, which has been dogged by conduct charges and a savage cost-cutting programme in recent years.
Indeed, the transaction also came just a week after the bank had posted a surprise £293m second quarter profit, confounding analysts who had expected a loss of similar size, and had got used to a seemingly endless run of quarterly gloom from chief executive officer Ross McEwan.
Crucially, though, RBS’s work on its capital profile has reassured investors, and that arguably led to RBS paying a shallower curve between its five and 10 year call dates than its peers in AT1.
“People will be thinking about returns of 10% in 10 years because of where you can mark the bond when it performs,” said one head of financial institutions syndicate away from the deal, at the time.
They are well on their way there. At the start of December the five year was bid at 6.5% in the secondary market, and the 10 year had tightened to 7.2%.
Tier Two Capital Deal of the Year
Crédit Agricole
€2bn 2.625% March 2027
$1.5bn 4.375% March 2025
Crédit Agricole
In financial institution bonds, 2015 was meant to be all about tier two. Late in 2014, analysts were queuing up to predict a surge of issuance as banks began the unenviable task of building a bucket of loss-absorbing debt equal to at least 16% of their risk-weighted assets, as the Financial Stability Board’s then draft total loss-absorbing capacity (TLAC) rules had stipulated.
As it turned out, those analysts were forced to queue up again to revise their predictions as uncertainty about the final rules, and a succession of divergent national responses to them in Europe, made banks think twice before rushing to the market.
But that didn’t stop some from getting on with the job. Rabobank printed the largest dollar deal of the year from a European bank in June, saving itself a fistful of spread, after Deutsche Bank, BNP Paribas and Santander had all taken big chunks of tier two out of the euro market earlier in the year.
But the deal that really set the tone for making a big dent in future capital requirements was Crédit Agricole’s €3bn-equivalent euro and dollar dual trancher, printed in March, which included the largest tier two bullet ever.
The French bank printed a €2bn 12 year bullet that pulled in over €10bn of orders, before taking that momentum into the US trading day to print a further $1.5bn of 10 year bullets, ending up with total demand over €16.5bn.
The trade took care of Crédit Agricole’s tier two requirement for the year in one fell swoop. Having indicated its intention to go for size, the issuer was rewarded for a patient approach. It had taken a full week to sit down with investors in Frankfurt, Cologne, London, Paris, New York and Boston, to lay the ground for its first tier two issue since 2010.
Around 450 investors participated in the record-breaking euro tranche, while 300 piled into the dollar notes.
As sole bookrunner, Crédit Agricole said both tranches came with just 10bp of new issue premium, and while rival bankers disputed that claim on the euro tranche, any criticism of the pricing was drowned out by praise for the scale of the trade.
The timing wasn’t bad either. Not long after the deal, Syriza began an increasingly fraught game of chicken with Greece’s bailout creditors, which led new issue premiums on tier two deals to skyrocket.