Trigger happy
It would have been laughable to think this time last year that a Spanish bank would open up the Additional Tier 1 market for all of Europe’s banks. But BBVA did just that.
Throwing caution to the wind, Spain’s second-largest lender shocked the market by pricing a US$1.5bn perpetual non-call five instrument in April, educating global investors in the process and ushering in a new era for bank capital.
“BBVA set a pricing benchmark for future issuance,” said Barry Donlon, head of capital solutions and liability management at UBS. “The structure had to be presented in such a way that investors understood what would happen if the bank breached one of its triggers.”
The complex structure of the bond, rated BB– by Fitch, included six different trigger points to reflect the requirements of the European Banking Authority, the Spanish regulator, and Basel III/CRD IV rules. The highest is a 7% Core Tier 1 equity test.
“Three [of those] are transitory, so it’s possible that investors will end up with just the CRD IV-related trigger over time,” said Erik Schotkamp, BBVA’s capital and funding management director.
Despite the complexity of the structure and the fact that the coupons could be turned off at the issuer’s discretion, some 400 investors placed orders that exceeded US$9bn.
The bank and its lead managers – BBVA, Bank of America Merrill Lynch, Goldman Sachs and UBS – laid the groundwork with a two-day European and Asian roadshow. At the time, there was no talk of the US Federal Reserve tapering its bond purchases, Asian private banks were still enamoured with bank capital and hedge funds were coming on the scene in force. Institutional investors’ hunt for yield was transcending any fears about a potentially calamitous market correction further down the road.
When BBVA brought the deal to market, it was against the favourable backdrop of Spanish 10-year yields falling below 4% for the first time since September 2010 as central bank easing drove a widespread risk-on mentality.
Still, the end result exceeded the bank’s expectations on size, price, and demand, and released almost 30bp of core capital. And, despite some early volatility, at the time of writing the bond is now trading up in the secondary market.
“The deal proved that if you can sell an Additional Tier 1 bond with six triggers then surely there is a market for an instrument without all this complexity,” said Hans den Hoedt, co-head of FIG DCM Western Europe at Goldman Sachs.
BBVA had paved the way for its European peers. Societe Generale followed soon after with another Reg S offering, Spain’s Banco Popular Espanol went for euros and most recently Barclays proved there is ample demand for these instruments in the US market.
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