European Additional Tier 1 (AT1) investors got the news this morning that they had been eagerly awaiting, since the demise of Credit Suisse at least, when Spain’s BBVA announced they were issuing a new AT1. Although the market had already been “technically” reopened, with a number of AT1 private placements in Asia and the Bank of Cyprus announcing a new bond yesterday, BBVA is one of the benchmark names in the AT1 index, and having launched the first AT1 deal back in 2013 it’s maybe fitting that they reopen the market after one of its biggest tests so far.
The new deal is expected to be Euro750m-1bn in size and has a call in 5.5yrs. The initial price talk (IPT) is 8.75%, which, although being obviously attractive relative to the AT1 market historically, is probably a touch lower than what might have been expected based on current secondary market levels. We think this is due to a number of factors, not least that yields offered in secondary markets are materially higher to their historic average, and with AT1 inventory apparently scarce, it’s not necessarily easy for investors to build reasonable positions in their favoured names. Therefore, despite the IPT not being overly generous in terms of spreads, we think that lead managers should be able to build a sizable book and the deal is likely to be significantly oversubscribed (books are indicated at ~Eur3bn currently). After all this will be the highest coupon AT1 in BBVA Group’s structure and the reset rate will be reasonably high at close to 530 bps.
Should this new issue attract significant demand, as we expect, it could be a very significant positive development for the AT1 market, and could be the catalyst that investors have been waiting for to help spreads grind tighter over the summer months. Having a high quality, global bank such as BBVA (only 25% of FY 2022 revenue came from Spanish operations), with an impeccable AT1 call record, will certainly help investor demand. In conjunction with this, the BBVA 5.875% AT1, with a call in Sept 2023, is now trading very close to par given that the call likelihood has increased. This bond was already firmly expected to be called but was nevertheless being bid at yields of 12-14% just a week or two ago – highlighting the yield disparities in the markets.
Despite the lack of a generous new issue premium, we wouldn’t be surprised to see the IPT tighten from here, and this will further serve to highlight just how attractive we think secondary yields are in AT1s, not only for the Spanish competitors of BBVA, but also the other large national champions across Europe. In addition to this, with most of the bonds in the AT1 index still trading to perpetuity, the ability to issue new bonds will once again highlights the risk of betting against bonds being called, especially when they are trading at significant discounts to par. Indeed, given the prices where AT1s are trading, Yields to Call can be up to 200-300 bps higher than the Yields to Perpetuity, which are the yields used in the ICE Boa AT1 index for example. If the majority of those AT1s are called at their first call, as we expect, then the actual yield achieved should be significantly higher than what the index data implies.
The AT1 market reacted strongly to the news a few weeks ago that the European banking authorities were looking at ways to support the sector , and while this new issue is not going to generate the same reaction, it is a very important step in the ongoing recovery of the market in our opinion.