LONDON, Aug 30 (IFR) - European banks are finally getting to work on upgrading their capital buffers, on the back of the regulatory certainty which the European Banking Authority finally granted at the beginning of June.
Societe Generale is the first bank to close a capital deal with the new regulations in place, but it will be quickly followed by a new hybrid deal from Credit Agricole, as well as a EUR5bn deal to retire outdated capital from Intesa, and a buyback from Nationwide.
The French bank, backed by joint leads Citigroup, Credit Suisse, Deutsche and HSBC, priced USD1.25bn, the upper end of the given size, at 8.25%, the tight end of the price range. The book reached around USD4.4bn, with only 9% Asian demand.
Leads executed intraday on Thursday, dodging possible volatility on the back of Syria and possible competing supply into September. SocGen CIB had the bonds 100.40-100.50 on Friday, from pricing at par.
The biggest benefit of having final EBA definitions to work with is supposed to be that it allows issuers to build in a "write-up" mechanism to their hybrids.
SocGen's AT1 is an instrument which absorbs losses through a write-down, triggered once the bank's regulatory capital hits 5.125% of CET1, which can then be reversed if the bank repairs its balance sheet.
This feature has been the subject of intense lobbying from hybrid structurers and investors, despite the tiny probability that it will be used. Regulators have been under pressure to include write-up provisions because they help to preserve the capital hierarchy of a bank. Common equity can recover as a bank recovers, but permanent write-down hybrids cannot.
This deal partly serves as a test of whether investors will put their money where their mouths have been - specifically, accepting a lower coupon on bank capital when the write-down is only temporary.
"There is no comparable in the market to allow us to truly calculate how much we saved by using a temporary write-down structure," said Vincent Robillard, head of group funding at Societe Generale. "But the investment banks have quoted between 25bp and 50bp."
The other big test for the deal is distribution. For Additional Tier 1 to make a meaningful contribution to European bank capital buffers (one investment bank estimated EUR38bn a year of issuance to IFR), it needs to sell to European institutional accounts, not just to private banks in capital-exporting regions like Asia or Switzerland.
Societe Generale's deal succeeded in this respect, with allocations as follows: By geography: the UK/Ireland 44%, France 13%, Switzerland 12%, Asia 9%, Benelux 7%, Southern Europe 6%, offshore 3%, Nordics 2%, Germany/Austria 2%, others 2%. By type: asset managers 62%, private banks 20%, hedge funds 10%, insurance/pension funds 5%, banks 3%.
New-style bank capital deals have almost always been in US dollars, the preferred currency of the private banks and also of sovereign wealth funds.
"There is still more appetite in dollars than in euros for subordinated capital," said Robillard. "It's partly a question of appetite, but partly market timing - I wouldn't be surprised to see a bank do AT1 in euro by the end of the year."
Also driven by the EBA's newfound clarity is Intesa's EUR5bn exchange offer, which seeks to replace Tier 2 capital that will not be grandfathered, with fully compliant Tier 2.
Eight LT2 bonds and one UT2 bond are being targeted, all of which will be gradually derecognised as capital from the January 2014 implementation of the Capital Requirements Regulation.
The offer is to exchange the bonds into new, fully compliant Tier 2 in a single 10-year bullet tranche with fixed-rate coupon at 450bp over mid-swaps. The offer is for any and all, meaning Intesa could swap the whole EUR5bn-equivalent outstanding.
The exchange is at fixed prices ranging between 88.75% and 107.75%, a range which offers a price premium of between one and two points to observable market levels.
Several of the bonds are stubs, though, having been the subject of previous liability management exercises. Only GBP5.35m of the GBP250m 3ML+135bp November 2017 LT2 is outstanding, and only GBP24.901m of the GBP165m 5.625% March 2019 LT2, for example. Holders declining to tender into previous liability management exercises may be harder to induce this time around.
Some of these also have substantial retail components, which can also make it harder to complete liability.
BofA Merrill Lynch, Banca IMI, BNP Paribas, Credit Suisse and Deutsche Bank are dealer managers, and the offer closes on September 5 at 5pm CET.
The other big banking group tackling the new world of capital is Credit Agricole, with a dated Tier 2 CoCo. That not only meets new regulatory requirements, but also meets the new and stringent S&P requirements to get intermediate equity credit - despite being rated BBB- by the agency.
The deal will be a 20-year with a 7% common equity Tier 1 trigger. S&P expects Credit Agricole's CET1 ratio to remain higher than 400bp above the 7% triggers in the next 18-24 months.
Credit Agricole CIB is global co-ordinator while Citigroup, Deutsche Bank, Goldman Sachs, HSBC and UBS are joint leads. A market source criticised the group of leads - not on grounds of quality, but on difficulty of co-ordination.
"Credit Agricole has not done this before, and it does not have much of a record as a bank capital powerhouse. All the other leads, however, are veteran capital houses, and all of them have the ear of the CFO. This is going to be an unwieldy syndicate."