Clearing the air
Sumitomo Mitsui Financial Group sold the first Additional Tier 1 bond from a global systemically important bank following Switzerland's controversial wipeout of Credit Suisse’s capital notes in March, helping clear the uneasy atmosphere prevailing in the AT1 market and paving the way for recovery in the asset class.
The decision in March by Finma, the Swiss regulator, to write down Credit Suisse's AT1s to zero while giving equity holders shares in its acquirer UBS, inverted the typical capital structure, triggering a sell-off in AT1 bonds around the world.
However, SMFG was able to return to the market the following month to raise more than US$1bn-equivalent from a two-part yen-denominated bond offering.
The trade comprised ¥89bn perpetual non-call five-year two-month and ¥51bn of perpetual non-call 10-year two-month notes. The success of the transaction gave the market comfort that banks could still access this source of capital.
“Market conditions were quite challenging,” said Noritaka Oda, debt syndicate head at SMBC Nikko, the sole lead for the deal. “When we talked with investors overseas, they said, ‘we cannot afford to buy [AT1 bonds]’, so we had to approach domestic investors.”
SMFG was careful in its approach, delaying its offering by a week to communicate more with worried investors and explain the regulatory differences between Switzerland and Japan. Investors' nervousness at the time was heightened because Japanese authorities were checking on bank capital holdings to assess the overall impact on financial market stability. The issuer spent nine days sounding out investors and four days on bookbuilding.
This groundwork resulted in increased demand. The issue size was initially shown at a total ¥80bn and then upsized to ¥110bn, before being raised further as last-minute orders came in. Orders came from more than 100 investors including life insurers, pension funds and corporate accounts. The size was even bigger than the ¥107bn the bank had raised from its previous AT1 sale in December 2022.
The coupon of the PNC5 is 1.879% for the first five years and two months and will change to the five-year JGB yield plus 171bp if not called. The coupon of the PNC10 is 2.18% for the first 10 years and two months and will change to the five-year JGB yield plus 171bp if not called. Both coupons will be reset every five years after the first call dates.
While SMFG had to pay up 22bp–33bp compared with its previous AT1 trade, that was a modest amount in the circumstances.
The deal helped reconstruct pricing levels amid elevated uncertainty in the Japanese AT1 market while creating momentum for subsequent deals from Mitsubishi UFJ Financial Group and Mizuho Financial Group.
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