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Derivatives

BBVA: showing the way forward in new-style capital

Like many banks in Europe’s periphery, BBVA continues to be dogged by the region’s perennial political and financial crises. But it is also a global brand, with a huge presence in growth markets like Latin America. That strength allowed it to triumph in capital issuance this year, writes Will Caiger-Smith.

After the fourth Capital Requirements Directive package was finalised earlier this year, few market participants expected Spain’s BBVA to be first out of the blocks with an additional tier one trade. In such a deeply subordinated asset class, most were expecting a strong and well capitalised Nordic bank to open proceedings.

But it quickly became clear that the surprise was a pleasant one, says Erik Schotkamp, head of capital management and long term funding at the Spanish lender.

“Nobody thought it would be us,” he says. “But early on in the debate with investors, we got clear feedback that out of most southern European credits, people had a preference for BBVA.”

That was important for a bank looking to enter a completely new and untested asset class for an expensive transaction. The decision to be the first into the market was driven by a desire to get ahead of the rest, as well as specific capital needs at BBVA.

“Once CRD IV was out of the door and confirmed, it became clear that looking at the structure of our capital base, we were fine in terms of equity but we needed to do some work on tier one capital,” he says. “We believed that on a near term basis, say one to three years, we would see a lot of these instruments coming to market.”

“We also held a relatively low non-core tier one component in our capital base against a substantial amount of deductions. Effectively, a number of deductions against total capital were eating into our core capital. By issuing this AT1 instrument for a minimum of €800m we could directly release core capital.”

The Basel III accord intended additional tier one to be a simple asset class compared to old-style tier one. But investors are still getting to grips with it, and BBVA’s instrument incorporated several extra features so BBVA took a very proactive approach to educating investors, wall-crossing several key buyers before announcing the deal.

“Once we had done that, we went to Asia and then did calls with Middle Eastern investors, before visiting Hong Kong and Singapore,” says Schotkamp. “The whole process of pre-sounding investors, roadshowing until pricing took around five working days, and it was pretty intense. 

“These deals require education — you have to spend quality time with people. You need to give investors time to do the due diligence work, and because they are higher beta instruments, you need a relatively tranquil market for execution. We were lucky to find a good window.”

“Having the whole execution process lined up, building confidence to launch it and going into it with a well filled soft order book, was a good decision. We worked on this deal for about nine months in total, from the first discussions with lead managers. Bringing it forward took a great deal of work, but it was received very well. It showed leadership.”

The resulting $1.5bn trade was well received by investors, with the leads gathering $9bn of orders. It was BBVA’s crowning capital markets moment in a year in which the bank issued far less debt that it had maturing.

“The policy of the bank over the last three months has been to lie low given that that our funding needs for the year have been covered through a mix and match of the deals we have done in the wholesale markets, a shrinking domestic balance sheet, and a good pick-up in local deposits. That leads us to a situation where given maturities are about €17bn for the year as a whole we don’t need to fully match those with wholesale market operations.”

When it comes to wholesale markets, however, it is not just need that governs BBVA’s strategy. It is also price, Schotkamp explains.

“We have proven we have access in various products, even in dollars. What worries is that we need to see a further compression in senior spreads. We haven’t yet reached levels that are fully economical for us to finance ourselves. If spreads remain stubbornly high, our desire to come to market won’t be as big as our maturity profile would suggest. That would mean internal portfolio run-offs, increased deposit gathering in Spain, and selective access to wholesale markets.”

Rising spreads are a definite possibility in senior unsecured, where bail-in is looming. But at the very least, BBVA is in a strong position in terms of capital issuance. 

“There are substantial needs within the European banking system for capital and bail-inable instruments,” says Schotkamp. “We’ve done plenty of homework to be able to bring another deal in the future, in the next 18 months or so. We’ve created a space in the market for ourselves.”  

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