Bookrunners’ comment:
We announced the trade at a target size of Sfr200m on Monday after soft sounding the note at a price guidance of 5.25%-5.5%. We then set the coupon in the middle of the range at 5.375%.
Announcing the trade at the minimum possible size allowed the borrower to benefit from price tension.
Some might say pricing was tight, but it offered a 200bp-250bp pick-up over Julius Bär’s outstanding old style lower tier two capital trade — a Sfr175m 4.5% 10 year non-call five, which was priced in November last year and was trading close to 3% on Tuesday.The perpetual deal also offered a pick-up over ZKB’s tier one security priced in January — a Sfr590m perpetual non-call 5-1/2 year deal carrying a 3.5% coupon.
The note includes a capital write-down feature. This will occur in case the borrower’s common equity tier one ratio (under Basel III) or core tier one ratio in Basel 2.5 terms, falls below 5.125% — a level which Finma signed off. This is one of the lowest possible figures to still comply with the Basel III framework.
The write-down might also occur if Finma considers Julius Bär to be non-viable at any point in time. The private bank can receive public sector support if and when it is deemed insolvent by the Swiss regulator.
Julius Bär’s note is callable after 5-1/2 years and at every interest payment date after that. The coupon is fixed until the first call date, at which point it will reset to 489bp plus five year mid-swaps.
There is no step-up option and the coupon is non-cumulative. The note includes a dividend stopper clause, which Swiss investors appreciated.
People might say this is an aggressive structure but the structure is bound to be aggressive as a new style tier one deal. And you still get exposure to a business model which is more stable than commercial Swiss banks. You could have a guy stand up and lose Sfr3bn overnight in larger financials, whereas that would never happen in a private bank like Julius Bär.
You’re also bound to get exposure to an issuer with a good capital structure. You have to have one if you are a private bank — clients will not join a dodgy-looking bank.
Market appraisal:
"...was bound to work even if Scor was out with a hybrid on the same day. People view it differently. One issuer is a private bank and one is a reinsurer. There is room for both in the market right now."
"...by comparison, this priced much tighter than the Credit Suisse coco bond printed earlier in the year. That deal printed at 7.125%.
The Julius Bär was fully retail targeted given it is not rated, which meant it could not have appealed to institutional investors. The fact that it would not have been able to take out substantial volume out of the market meant the bank did not need to price to size a massive deal.
Credit Suisse, on the other hand, priced to reach a large size and lifted over Sfr700m from the market."
"...I don’t think there was the risk of an overlap with Scor. There is enough cash around for both trades. Now everyone is back from the holidays and the market is really healthy. It is in the position to absorb all of recent transactions, including the two hybrids."
