Standing apart
Even before markets were thrown into turmoil by Russia’s invasion of Ukraine in February, one product was conspicuous by its absence in the European FIG space in 2022: euro benchmark Additional Tier 1 bonds.
The conflict propelled AT1 yields to highs not seen since the early months of the coronavirus pandemic in 2020, battering a product already hard hit by rising rates. A fall in capital supply had been expected, but the turbulence threw existing issuance plans into disarray.
After conditions improved into March and markets gradually reopened, up stepped Intesa Sanpaolo to reopen the sector with a €1bn perpetual non-call 6.5-year transaction.
When the deal emerged on March 23, bankers knew how vital it was that Intesa got the transaction right – for the whole AT1 market.
Those on the sidelines cautiously observed that an Italian bank, even a national champion such as Intesa, was not an obvious first mover.
Analysts also noted the bank’s exposure to Russia, with Intesa having reported one week earlier that its loans to Russian and Ukrainian clients amounted to €5.1bn net of guarantees from export credit agencies – although its exposure has since been sharply reduced.
Bookrunners BNP Paribas, Bank of America, Citigroup, Deutsche Bank, IMI-Intesa Sanpaolo, Morgan Stanley and UBS set the ball rolling with initial price thoughts of the 6.625% area.
The response was emphatic, with demand closing at more than €2.6bn – the book dominated by non-Italian accounts, which were allocated 89% of the deal, and fund managers, which took 77%.
That allowed the leads to set the size at €1bn and the coupon at 6.375% – incorporating a premium of around 37.5bp.
The trade established the clearing levels at which European banks could resume issuance of their most strategically important product.
It tested the premium required to bring to life an AT1 market that had until then seen just €150m of euro-denominated supply since the turn of the year.
Intesa’s timing was soon vindicated as seasoned issuers Rabobank and Deutsche Bank came to market the following week with AT1s of their own.
But the more important vindication of the reading of the market by Intesa and its leads comes from the trajectory of the AT1 market over the rest of the year.
At the time, the deal’s coupon felt a long way from the historically low levels AT1 issuers had enjoyed in the heady days of September 2021.
But coupons trended higher over the course of the year, until by November nine or 10 handles were the norm for core European national champions.
In a year characterised by swathes of no-go days and the importance of timing, Intesa’s defining transaction stands apart.
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