Less than a month ago, the world of fixed income, especially the financial institution bond market, looked very different from the way it looks now. Market participants had just gone through a bout of repricing, having deferred their expectations of when central banks would begin cutting interest rates.
Fast forward to this week and credit markets were firing on all cylinders across markets and currencies, supporting one of the busiest bursts of additional tier one capital issuance.
Banks in Europe and the Middle East used different tactics this week to raise the most subordinated kind of debt, printing nearly $6bn-equivalent in euros, dollars and sterling.
FIG market participants’ eyes were fixed on European issuers as the holiday-shortened week in the region meant a very narrow issuance window of just two days. Yet neither that timing constraint, nor the concentration of deals across the FIG capital structure derailed banks’ capital refinancing. The result was an encouraging signal for others looking to raise sub debt.
In euros, a week’s worth of issuance was packed into Tuesday, with subordinated deals achieving the largest sizes, along with Citigroup’s senior bond.
Banco Santander and Erste Group printed simultaneously, respectively, a €1.5bn 7% perpetual non-call six AT1 and a €750m 7% perp non-call 7.4.
Investor-friendly issuers
Also on Tuesday, NatWest Group turned to dollars with a $1bn 8.125% perp non-call 10 SEC-registered deal, taking global orders, as well as selling to US accounts.
“When was the last time there were three AT1s in the market on the same day? Never. It’s a first,” said one senior banker. “There is no comp between dollar and euro deals. But what stood out in euros is that basically they were all launched at the same price and [with the same] approach, doing liability managements.”
Since starting to track euro and sterling deals in 2020, GlobalCapital’s Primary Market Monitor had never before recorded more than two AT1 notes being issued on the same day.
Sentiment was helped to a large extent by investor-friendly issuers.
As Santander and Erste both launched tender offers for existing AT1s ahead of the deals’ first call dates, the market was arguably keenest to see how Santander’s trade would go, considering its history of choosing economics over accommodating investors.
“The biggest story this week was Santander,” said a head of debt syndicate away from the trade. “It’s how much more investor-friendly they are [than in the past].”
After becoming the first major bank to extend an AT1 after its first call date in 2019, sending shockwaves through the market, Santander behaved completely differently this time.
It offered to buy back its €1.5bn 4.75% AT1 callable in March 2025 at par, when it had been quoted at 97.377 before the new deal’s announcement. It traded to par and boosted confidence in other out-of-the-money AT1s, which moved up “quite aggressively”, said the syndicate head.
Meanwhile, Erste was holding a tender offer for its €500m 5.125% non-call October 2025 note at 99.25, more than a year before its first call date.
Santander’s generous offer, leaving nearly three percentage points on the table, “made Erste look very unfriendly, as if they were stealing from investors wanting par, even if they were giving [about] two points” more than where the old AT1 was trading, said the rival banker.
Coming to terms with the new norm
These investor-friendly approaches added to the warm sentiment towards AT1s.
This higher yielding paper fits the bill of what investors have desired, especially after recalibrating their expectations on rates, particularly in the US, concluding that they are likely to remain higher for longer.
Being a “high beta product, for it to work you need a good session and some bullishness in the market,” said one syndicate manager. And the market had indeed turned after last week’s comments at the Federal Open Market Committee, where chair Jerome Powell rejected any possibility of a rate rise.
“On the positive side,” continued the syndicator, “before this week we had not seen much supply [in euros], only the AIB [on April 23] and before that Fineco [on March 4].” He highlighted how the “negative supply over the past 12 months [will] probably continue,” fuelling demand among various types of investors, such as sub debt specialists, which “will need to buy the supply that is coming as long as it is fairly priced.”
Indeed, FIG investors that had started demanding positive new issue concessions on unsecured bonds over the past month or so, on Tuesday and Wednesday were swallowing tier two capital flat to fair value in euros and sterling.
“[It] seems like we have turned a corner once again on the higher for longer [rates] in the US side, and now it seems again people are loading up on fixed income,” said a head of syndicate involved with Tuesday’s new issuance.
He thought there would still be “twists and turns before we get to a rate cut, but, for now, people are making hay while the sun is shining, figuratively and physically” as he underlined that senior and even tier two deals were again pricing close to fair value.
On Wednesday, Barclays combined all these factors and an expected shortage of its capital — as it may turn into a net negative AT1 issuer in 2024 — to fund inside fair value. The £1.25bn 8.5% perp non-call 6.5 SEC-registered deal was priced with up to 20bp of negative new issue concession.
While criticising Barclays’ choice of currency, suggesting it could have achieved better deal economics in dollars, one rival head of FIG syndicate said that in “a bull market for credit, Barclays in sterling is a great buy”.
Dollar bonanza
Like its compatriot, NatWest was able to slash 62.5bp from the initial price thoughts of its AT1, even going longer with a 10 year non-call period. It amassed about $11bn of peak demand, with some $4bn of orders already placed before the US market opened, said a banker on the deal. “NatWest was definitely leaning on US demand, especially due to the perp non-call 10 maturity,” he said, but added that there was also “massive participation from Asia”.
There was also an innovative dollar trade from the Middle East, as Saudi Arabia’s Al Rajhi Bank issued on Thursday the world’s first public sustainable AT1, a $1bn perp non-call 5.5 sukuk.
A variety of issuers across Asia, Europe and the Middle East have issued green, social and even sustainability-linked AT1, but this was the first with proceeds marked for sustainable financing.
The world’s largest Islamic bank priced the deal at 6.375%, 50bp tighter than initial guidance, but cut the size from the initial target of $1.25bn.
A mitigating factor for that outcome, said an emerging markets debt capital markets banker away from the deal, was that market conditions had been stronger in February, when Gulf peer Alinma Bank printed its $1bn perp at 6.5%.
Another Europe-based originator echoed this view: “AT1 is perhaps more tricky to issue than it was a few months back. Some of the bigger banks has already printed [AT1] in dollars and the spreads have widened a bit.”
Seismic shifts
The AT1 investor base has also changed since the Swiss regulator wiped out Credit Suisse’s $17bn of AT1s in March 2023.
Before that, big private banks bought AT1s — but since CS’s collapse more institutional investors have stepped in. Some market sources even argue that the asset class has become better established.
After issuing a $1bn 7.875% perp non-call six AT1 in February, Richard Staff, Standard Chartered’s head of capital and term issuance, told GlobalCapital: “The AT1 asset class continues to evolve and the increased involvement of asset managers as an investor base has helped broaden the market.” Almost 300 investors bought StanChart’s deal, with about 70% taken by asset managers.