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(CORRECTS stat about RBS deal in graf 11, StanChart book toover US$20bn in graf 12, and coupons to fixed in grafs 26 and27)
By Will Caiger-Smith and Helene Durand
NEW YORK, Aug 11 (IFR) - Issuance of risky Additional Tier 1capital could be set for a revival after Royal Bank of Scotlandand Standard Chartered printed large dollar deals that ralliedin secondary trade.
The deals were the first AT1s from UK banks since the Brexitvote on June 23, and the juicy yields on offer attracted buyersdespite broader concerns around the country's economic outlook.
They performed well in the aftermarket, giving participantsanother sign that the asset class is breaking free of themalaise that has afflicted it for much of the year.
"Investors are finally waking up to the fact that the AT1sector has underperformed this year and that there isconsiderable relative value to be had," said Mark Holman, CEO ofTwentyFour Asset Management.
The Bank of America Merrill Lynch contingent capital indexhas bounced by 10.26 points to a dollar price of 99.05 sincehitting a trough of 88.79 on February 12.
The February sell-off was driven largely by concerns thatDeutsche Bank, still in the throes of a vast restructuring,might not be able to pay coupons on AT1 debt.
But as such fears subside and buyers chase yield, the assetclass is catching up to the broader credit rally.
Given the strength of investor demand, bankers said even thelikes of Deutsche Bank might now be able to stage a comeback.
"They have the right brand and they need the capital - itwouldn't surprise me to see them do a transaction," said a FIGDCM banker.
"Since the Deutsche Bank scare in the first quarter, we'veseen a consistent bull market. That hasn't manifested itself inAT1 until now."
MILESTONES
RBS's US$2.65bn perpetual non-call five-year deal was thebiggest ever single-tranche AT1 from a European bank in USdollars. Investors placed US$16bn of orders for the deal, whichpriced at 8.625%.
StanChart secured the biggest book for a European bank AT1so far this year. Investors placed over US$20bn of orders forthe US$2bn perp non-call 5.5-year deal, which priced at 7.5%.
Both deals will convert to equity if the issuer's CommonEquity Tier 1 capital ratio falls below 7%.
StanChart took advantage of its strong name recognitionamong Asian private banks, adding a Reg S tranche to its deal.
UK banks had been rumored to be looking to access the marketafter reporting earnings, with bankers saying conditions werethe strongest they had been in months.
"We chose the timing based on the supportive backdrop inglobal markets recently improvement in AT1 market dynamicssince the dislocation earlier in the year," said Rupert Mingay,group treasurer at StanChart.
The deal also took advantage of improving investor sentimenttowards the bank, he said.
"Many are viewing StanChart as having the worst of theirloan losses behind them," said Holman at TwentyFour AssetManagement.
Even RBS's announcement of a £2bn (US$2.6bn) first-half lossdid not dent investor enthusiasm for its deal. Analysts saidboth banks had made good progress in restructuring.
"[Their results] highlighted both the progress they havemade in their restructuring efforts as well as the challengesand headwinds they face," senior CreditSights analyst SimonAdamson said in a report.
"Both banks' capital ratios are well above minimumregulatory requirements, and both have substantial distributableitems to support coupon payments."
RBS has now met its £2bn AT1 issuance target for 2016 andthe majority of its total AT1 requirement. A spokesman said thebank currently has no plans to issue more AT1s.
StanChart now has just US$1bn-$2bn of AT1 left to raise bythe 2019 deadline, according to Christopher Daniels, the bank'sglobal head of capital management.
RELATIVE VALUE
Investors were attracted to the deals partly by the juicyfixed-rate coupons on offer.
But the decline in swap spreads since RBS and StandardChartered were last in the market means the deals switch to ahigher back-end floating rate if they are not called.
RBS's deal resets to a coupon of mid-swaps plus 759.8bp ifit is not called after five years, compared to a back-end couponof 580bp for the 7.5% AT1 it issued last year.
StanChart's deal resets to a coupon of 630.1bp overmid-swaps if it is not called after 5.5 years, compared to aback-end coupon of 488.9bp for its last deal.
"The one with the larger reset is more likely to be calledor tendered for by the bank," said a buyside trader. "And ifnot, it resets to a higher coupon."
RBS's new bonds were trading 1.5 points above par onThursday, while StanChart's were around 75bp above par.
But because of the higher yield to call - around 8.9% forRBS and 8.4% for StanChart - both banks' previous perp non-callfives also rallied around one point after the new deals priced.
By Thursday, RBS's 7.5% bonds were trading at 8.7%, whileStanChart's 6.5% notes were trading at 8.07%. (Reporting by Will Caiger-Smith; Editing by Marc Carnegie)
