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REFILE-UBS ushers in TLAC callable for Europe's lenders

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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 regulatory clarity.

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 Citigroup.

"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 loss-absorbing capacity.

"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 recognition. (Reporting by Alice Gledhill, Helene Durand, Editing by Sudip Roy, Julian Baker)

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