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Novel Twist in Nationwide AT1

18 September 2019 by Gary Kirk

Regular readers of our blog will know that in the world of additional tier 1 (AT1), the Nationwide Building Society has been one of our favoured issuers in the market. We held the old sterling Nationwide 6.875% perpetual bonds from launch in 2014, and were not in the least surprised when the issuer called the bond at the earliest opportunity in June, though it did leave us a gap to fill in the subordinated bank sector.

Given Nationwide’s overall level of capital remains one of the most robust in the financial sector, and thus in our view there was no pressing requirement for any new issuance, we were pleasantly surprised by its announcement of a new AT1 bond on Tuesday.

True to form, Nationwide showed itself to be a prudent operator. This new issue guarantees flexibility and a strong buffer against the introduction of new methodology from rating agency Standard & Poor’s, which is attempting to improve the consistency of its calculation of risk-adjusted capital (RAC), potentially impacting ratings. In addition, the new capital also gives Nationwide immediate relief against a drop in its leverage ratio caused by a temporary increase in the pension deficit; the £600m issue effectively restores the ratio back above a healthy 4.5%.

However, what really caught our attention was a rather novel twist in the new AT1’s structure. The deal itself is a typical sterling denominated perpetual bond with the coupon switching to a spread (539bp) over the current five-year Gilt in June 2025 (i.e. 5.5 years to call). However, the bond language allows the bond to be called at par at any time in the six months prior to the June 2025 call date. This addition to the documentation gives Nationwide considerable flexibility in choosing an optimum time to refinance the deal, without having to incur any period of coupon overlap from two concurrent issues being punitively funded at the same time. Recently, we saw Coventry Building Society announce a tender offer (at a 2.25% premium) to address exactly this scenario, and we believe this latest development from Nationwide is further evidence the UK regulator is assisting banks in making the refinancing of these capital notes as efficient as possible.

It should come as a welcome development for all AT1 issuers, as prudent banks have consistently pre-funded upcoming maturities, incurring the burden of two coupon payments. We expect this innovation from Nationwide to be adopted by more borrowers going forward.

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