Pushing the boundaries: Over the past year, US banks have gone on a capital securities issuance spree, and European financials have regained access at more reasonable levels. For showing leadership and providing a safe pair of hands to its clients, Bank of America Merrill Lynch is IFR’s Financial Bond House of the Year.
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Bank of America Merrill Lynch has led the way in the US FIG market, quickly identifying the latest trends, including the willingness of US investors to go down the capital structure to buy subordinated, hybrid and non-common Tier 1 securities in the quest for yield.
Part of the trend has been the resurgence in the US institutional and retail markets of perpetual preferred securities, a market that was decimated by the financial crisis.
Perpetual preferred stock issuance soared to US$34.6bn in 2012 to the end of November, from US$10.5bn in the full-year 2011 – largely because banks replaced old Trust Preferred Securities with new non-cumulative perpetual preferred Tier 1 deals.
Something like US$80bn of TruPS on banks’ balance sheets is likely to be replaced over the coming years by non-cumulative preferreds in Tier 1 capital.
BofA Merrill’s efforts in 2011 to kick-start the pref underwriting business gave it a first-mover advantage. It was mandated twice as often as its nearest competitors in 2012, with 112 deals underwritten for a 17.7% market share by mid-November, compared with 43 deals for a 15% share from Morgan Stanley and Wells Fargo Securities’ 55 mandates for 13.4% share.
JP Morgan, BofA Merrill’s biggest competitor in all other areas of the fixed-income markets, had an 8.2% share of perpetual preferred issuance.
Wells Fargo chose BofA Merrill as bookrunner to lead its US$750m perp non-call five year 5.2% Tier 1 preferred in August, which broke the record for lowest dividend, as well as its November 13 US$600m perp that broke its old record with a dividend of 5.125%.
BofA Merrill was also a joint bookrunner on Prudential Financial’s US$1bn 10-year non-call 30 hybrid, the first such structure since the firm plummeted from grace in the 2008 crisis.
The bank also helped to reopen the market for European issuers in 2012, serving as a joint bookrunner on Rabobank’s US$2.5bn 3.375% five-year in January as well as BBVA’s US$2bn three-year Yankee in October, which reintroduced eurozone peripheral banks to the US dollar market.
BofA Merrill led innovation in the US dollar covered bond market, where it is a dominant player. It was joint bookrunner with Barclays, Deutsche Bank and Morgan Stanley on the first ever seven-year covered bond in US dollars – the US$1.5bn 1.875% 2019s by Sweden’s Stadshypotek, the covered bond issuing entity of Svenska Handelsbanken.
“This is the next step in the development of the covered bond market in the US,” said Dan Mead, head of FIG syndicate. “Hopefully more issuers will look to do longer maturities in dollars, which historically have only been available in the euro market.”
Shining in Europe
The past year presented another challenging market backdrop for FIG houses across Europe. The regulatory landscape continued to change under the feet of banks that were desperately seeking attractive market windows to prepare for the one change they knew for certain was coming – the necessity of holding more capital.
BofA Merrill helped lead that charge. Although the firm is often considered to be a US-focused FIG house, the team in Europe have competed with peers and solidified an important position in the market.
As a steady flow of capital insurance and reinsurance business carried through the year, BofA Merrill made sure it was best placed to help issuers Swiss Re and Zurich sell European hybrid transactions in the euro and sterling markets.
Zurich relied on BofA Merrill to guide it as it sold an unsecured deal in June, representing the issuer’s first unsecured offering since 2009. The 10-year €500m transaction was a blowout, ending up with an order book that was eight times oversubscribed.
“Last year it was all about funding, this year it was all about smart funding,” said Marc Tempelman, head of FIG debt capital markets, EMEA.
“The mood is substantially better this year, which is not to say that anything has fundamentally changed. But the mood of our client base has improved, which has helped to stabilise the market.”
Indeed, the more positive tone in the market, following the arrival of €1trn of ECB cash through twin LTROs, allowed banks to once again issue senior debt. However, the market was in a delicate state and issuers like Santander and Intesa needed careful execution as the success of their deals could make or break the market.
With the help of BofA Merrill, Santander was able to sell €2.5bn of senior debt and Intesa €1.25bn of seven-year senior debt, both of which allowed for follow-on peripheral issuance.
Frequent issuers also relied on BofA Merrill’s sound judgement as Rabobank, Lloyds and ABN AMRO turned to the firm to help them execute deals that would perform and allow for follow-on issuance.
Resurrection men
BofA Merrill flexed its muscles early in the year and helped to resurrect the callable Lower Tier 2 market that had been dormant since 2008. Nordea sold a heavily subscribed 10-year non-call five lower Tier 2 bond. And with orders in excess of €4bn it proved there was ample demand for issuers like Swedbank and SEB, which followed later in the year.
Rabobank was similarly reliant on sound bookrunner advice when it returned to the subordinated debt market in September to raise €1.65bn-equivalent of Tier 2 debt that will allow the issuer to protect its senior debt from looming bail-in regulations.
The issuer priced a dual-tranche €1bn and £500m issue that attracted more than €3.6bn of demand across both tranches and was the first ever sterling Tier 2 from the prolific senior unsecured issuer – and its first euro deal since 2010.
Never one to shy away from contentious business, BofA Merrill recognised the importance of the liability management sector and executed some of the most complex exercises of 2012.
Italy’s largest retail bank Intesa Sanpaolo sent shock waves through the market when it announced that it was changing its call policy on some of its subordinated debt and amending the terms without bondholders’ prior approval.
The take-up rate on Intesa’s controversial liability management exercise appeared to vindicate the issuer’s decision to approach investors in a coercive fashion and is expected to be replicated by other banks in the future.
BofA Merrill was there for more straightforward LMs too, helping three of the five-largest bank transactions – from Lloyds, Santander and Credit Agricole – to retire billions of euro bonds.
Pushing the envelope
But it wasn’t all about primary supply in the MTN space. BofA Merrill executed 240 private placements for European clients such as ABN AMRO, DNB, HSBC, ING, Lloyds, Rabobank and Westpac, raising a total of US$11.5bn. This compared to a total of US$6.1bn from the year before.
“We have outperformed in ECP for the past year and have been bringing new issuers to the market that have not had access,” said Julia Hoggett, head of FIG flow and money markets.
Possibly the best endorsement of a bank’s abilities to address the market comes from competitors. BofA Merrill’s peers have turned to the firm time and time again, as was the case when UBS and JP Morgan chose BofA Merrill to assist them in selling subordinated debt in size in the dollar market.
