(Adds missing word in last paragraph)
By Alice Gledhill and Helene Durand
LONDON, Nov 25 (IFR) - UBS sold the first euro senior bond
from a European bank with a call option one year ahead of
maturity, setting a template for banks across the region to
replicate the structure as they seek to efficiently build their
layers of loss absorbing debt.
US banks pioneered the use of senior callables this year as
a way of addressing the reduction in regulatory value as Total
Loss Absorbing Capacity bonds approach maturity. The call allows
issuers to redeem bonds early, saving interest payments on debt
that provides no regulatory benefit.
However, banks in Europe had been reluctant to follow in
their footsteps due to pricing considerations and lack of
The success of the self-led 1.25bn eight-year non-call
seven bond, which attracted 2.6bn of demand from 191 investors,
is now expected to pave the way for other banks.
"Hopefully, this deal makes it easier for other banks to
follow," said a banker familiar with the trade.
"We have had a huge amount of interest from UK banks on the
back of the trade. A lot of our treasury peers felt that this
was a good precedent for the market."
The Bank of England explicitly signed off on the callable
structure earlier this month and UK banks had been hotly tipped
to be the first to market.
A comprehensive package of new rules unveiled by the
European Commission this week will also likely further bolster
the callable senior structure in Europe.
"The EC is blessing the callable MREL structure which is
good," said Simon McGeary, head of European new products at
"Banks can get MREL treatment up to the call date provided
that there are no incentives to redeem, which paves the way for
US style callables in Europe."
UBS's trade priced at 108bp over eight-year swaps, inside
guidance of 110bp area and after initial talk of 120bp area.
So far, there has been a split over whether to price the
debt based on final maturity, or to the call date given banks
are expected to retire bonds then.
The banker said UBS paid a 21bp premium in total, 6bp of
that for the call, in line with what US banks have been paying.
The Swiss lender in August dipped a toe in the callable
market with a 1.25bn 10-year holdco bond callable three months
prior to maturity, but no European bank had yet taken the plunge
with a one-year call.
Strong demand for callable euro seniors from Goldman Sachs
and Morgan Stanley in October proved the depth of investor
demand for this type of bond in Europe, with feedback following
UBS's August deal providing further comfort.
"The evolution of the market has been interesting," the
banker said. "When we saw investors on the Continent earlier on
this year, they weren't quite ready but there's been a strong
move forward from accounts and the gap is closing between
callable and bullet trades."
UBS did not comment on whether its regulator had given the
structure an official sign-off, but the bank was unlikely to
have proceeded without confidence on that point, sources said.
"Today's structure implies that UBS has also been given the
green light by the Swiss authorities for this structure,"
CreditSights analysts wrote in a note.
CHERRY ON THE CAKE
If strong demand and competitive pricing was not enough, UBS
got an added perk from S&P explicitly blessing the structure
this week, saying it would count towards the bank's additional
"The expectation that we would include these proposed notes
in our calculation of UBS' ALAC reflects our view that the notes
would have the capacity to absorb losses if UBS Group AG enters
a resolution process," it said in a release.
"While the issuer has the option to redeem the notes earlier
than the maturity date, in our view FINMA has what amounts to an
implicit approval requirement for an early redemption."
According to the banker, it was the bank's first security in
EMEA to which the ratings agency had given full ALAC
(Reporting by Alice Gledhill, Helene Durand, Editing by Sudip
Roy, Julian Baker)