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By Will Caiger-Smith
NEW YORK, July 29 (IFR) - Several UK banks could reopen theAdditional Tier 1 capital market in the weeks ahead, asyield-starved investors find more to like in the risky assetclass.
AT1 issuance from European banks is down more than 50%year-to-date compared to 2015, and HSBC is the only UK bank tohave sold a deal in what has been a horrid year for the assetclass, pricing a US$2bn perpetual non-call five note at 6.875%in May.
But bankers say names including Standard Chartered, RoyalBank of Scotland and HSBC may have a chance in August to get newdeals over the line and shore up their capital buffers.
"There are a number of UK banks that have wanted to issueAT1 this year and have not been able to," one debt capitalmarkets banker focused on UK lenders told IFR.
"They have not much more than a week between [the end ofearnings] blackout and people going on holiday," the bankersaid.
"There is a window - and it has to be quite well timed."
HSBC and Standard Chartered report earnings on Wednesday,RBS on Friday.
The lenders are likely to benefit from strong demand inrecent weeks for higher yielding assets among US institutionalinvestors and Asian private banking clients.
"There has been a resurgence of demand for yield productsbecause of what central banks are doing," one syndicate bankersaid. "More investors globally are comfortable going down thecapital structure."
Supply in the sector has been scant since February, when AT1sold off sharply on worries that Deutsche Bank might have tosuspend payments on its AT1 debt.
US dollar-denominated UK bank AT1 paper traded out to anaverage yield of 10.93% at the height of the sell-off, accordingto data from MarketAxess.
There was also another burst of volatility in the sector inthe run-up to the UK referendum on whether or not to remain inthe European Union.
IMPROVED CONDITIONS
Yet AT1 prices have rallied overall - and marketparticipants say issuance conditions for the asset class are nowat their best since before February's sell-off.
While dollar-denominated UK bank AT1 yields were at 7.83% asof Wednesday, according to MarketAxess - more than 1.3% higherthan at the start of the year - buyers are clearly more positiveabout the asset class and on the outlook for UK banks.
Standard Chartered's outstanding US$2bn 6.50% perpetual thatis callable in 2020, for example, is trading at a yield-to-callof 8%, compared with 11% in the aftermath of the Brexit vote andnorth of 14% in mid-February.
RBS has a US$2bn 7.50% note, also callable in 2020, tradingat 8.39%, down from 11.5% post the referendum, while itsUS$1.15bn 8% bonds callable in 2025 are at 8.16%, about 160bplower than where they were on June 27.
Several recent deeply subordinated capital deals targetedtowards Asian private bank investors have shown buyers arereceptive to riskier instruments.
Zurich Insurance, Prudential and Da-ichi Mutual Life haveall sold capital paper in recent weeks, predominantly to suchinvestors.
If the UK banks do issue, they are likely to target thatdemand through a Reg S/144 A issue. "The Asian Reg S market hassprung back to life," said a bank capital structurer.
"It usually happens when the coupon is attractive comparedto other opportunities, or when private banks provide newleverage to investors to buy the paper."
To meet regulatory requirements, UK banks must hold at least2% of their risk-weighted assets in AT1 capital, which sitsabove common equity in the capital structure.
They are allowed to fill that buffer with cash and commonequity, but AT1 securities are generally cheaper to issue.
They are designed to absorb losses, with triggers for coupondeferral and permanent writedown or conversion to equity when abank's capital ratios become depleted.
HSBC said in its Q1 earnings call in May that it hadUS$10bn-$30bn of new debt and capital issuance to do to meet itscapital requirements by the 2019 deadline, but did not specifyhow much of that would be in AT1 format.
RBS has said it has an AT1 requirement of £4bn-£5bn. It madeheadway into that through those two dollar notes that raised anequivalent of £2bn. It has a target of £2bn of AT1 in 2016.
The issuance of AT1 securities is likely to become a moreimportant way of meeting those capital requirements as the UK'sdecision to leave the EU starts to bite into the economy, saidS&P analysts in a recent report.
"Economic uncertainty following the 'leave' result couldslow banks' internal capital generation, making deleveraging andhybrid capital issuance the main drivers of future improvementsin the UK banks' capital positions," they wrote.
Lloyds Banking Group has already emerged as an early victimof the uncertainty around Brexit. It cut its forecast for a twopercentage point capital accumulation in 2016 to 1.6 points, dueto the exchange rate impact on assets. (Reporting by Will Caiger-Smith; Additional reporting by AliceGledhill and Tom Porter; Editing by Marc Carnegie, ShankarRamakrishnan and Sudip Roy)
