Rating: A2
Amount: £250m lower tier two capital
Maturity: 15 January 2018
Issue/fixed re-offer price: 99.783
Coupon: 5.5% until 15 January 2013; thereafter coupon changes to three month Libor plus 83bp
Call option: at par from 15 January 2013
Spread at re-offer: 80bp over the 5% 7 September 2014 Gilt
Launch date: Friday 17 November 2016
Payment date: 1 December
Joint books: BNP Paribas, Lehman Brothers
Bookrunner's comment:
BNP Paribas — The transaction was an overwhelming success. Bradford and Bingley had not done a lower tier two for a while, so investors were receptive to the new issue.
It is a well liked credit and the roadshow we undertook went extremely well with all the accounts expected coming in.
The quirky maturity of January 2013 for the call gave an optically attractive spread since the deal was priced against the September 2014 Gilt.
However, the inverted curve meant that Bradford & Bingley was able to get an attractive level of around 33bp against Libor which was in line with where SEB priced its lower tier two this week at 33bp-32bp against Libor.
Bradford & Bingley's 2010 lower tier two and SEB's upper tier two with a 2010 call are trading in line with each other for the same maturity in the mid-60s over. The new deal was priced inside SEB since the Bradford & Bingley deal is for six years and one month while SEB's is for five years.
The order book was for just in excess of £700m. The issuer only wanted to raise £200m but to reduce disappointment was prepared to increase the deal to £250m. The allocation process was difficult nevertheless.
The distribution was almost exclusively to the UK, although we had some pockets of demand in Switzerland and Scandinavia. Having marketed the deal at the 82bp area over Gilts, we were able to price it at 80bp on the back of the strong demand which was further helped by the fact that Bradford & Bingley has called a deal with a 2006 call date.
Lehman Brothers — On November 1, Bradford & Bingley announced it had mandated Lehman and BNP Paribas for a sterling lower tier two transaction.
To update investors on the credit, a roadshow was scheduled in Scotland on November 13 and in London for the two following days. Demand for one-on-one meetings was considerable, with most investors indicating that they would have interest in the upcoming trade.
On Thursday (November 16) we went out with a January 2018 non-call January 2013, guidance of the Gilts plus 82 area, targeting a £200m transaction size.
The book built strongly over the day, with over £700m orders received by the time books closed at 5pm. The vast majority of the book comprised UK real money insurance companies and asset managers. Given the level of oversubscription, the issuer decided that to respond to investors' support for the transaction, the size would be increased to £250m (this latter figure representing the maximum amount of lower tier two Bradford & Bingley could raise).
On Friday November 17, the guidance was refined to Gilts plus 80bp and £250m was duly printed. All investors reconfirmed their orders at the new level. We saw follow-on demand from UK real money investors and closed the bonds Gilts plus 79bp-77bp.
To gauge relative value, accounts considered both outstanding Bradford & Bingley issues. The 5.625% perpetual non-call 2013 upper tier two at Gilts plus 89bp and other UK bank credits such as the Nationwide 5.25% 2018 non-call 2013 lower tier two at Gilts plus 76bp.
A differential of approximately 10bp between upper tier two and lower tier two in this part of the curve was considered fair value.
Another reference investors were looking at was the differential between Bradford & Bingley 2010 lower tier two and SEB's upper tier two with a step up in 2010 which were trading at Gilts plus 63bp and Gilts plus 64bp respectively.
The new SEB perpetual non-call five year upper tier two came at Libor plus 34bp while the new Bradford & Bingley lower tier two priced at Libor plus 33bp — confirming the relationship seen in 2010 whereby SEB upper tier two trades broadly flat to Bradford & Bingley lower tier two.
If anything, the longer economic maturity of the new Bradford and Bingley versus the new SEB implies that Bradford & Bingley lower tier two now trades a few basis points tighter than SEB upper tier two.
Market appraisal:
"...Bradford & Bingley is quite a difficult name to sell and the issuer recognises that and therefore went out with a price guidance that would appeal to investors.
Furthermore, the 12 year maturity is not the easiest and investors' appetite is more concentrated in 10 years. However, with the right guidance, the transaction appeared to have been well received."
