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By Mike Gambale and Danielle Robinson
NEW YORK, Oct 29 (IFR) - Fears of a deluge of subordinateddebt issuance from European banks in coming years was one of thefactors that weighed on Lloyds Banking Group's efforts onWednesday to price its first Tier 2 Yankee bond in four years.
Lloyds had to price its US$1bn 4.5% 10-year subordinateddeal wider than initial price thoughts to place the bonds.
The deal priced at 225bp over Treasuries on a solid book ofUS$3.5bn, but only after the bookrunners revised the 215bpwhispers to 230bp to gather enough interest and then going outwith guidance at 225bp.
Investors said Lloyds also decided to keep the deal atUS$1bn in size, rather than try to grow it by anotherUS$250m-US$500m.
"It was just too tight for us," said one portfolio manager."I dropped out when they decided to price it at 225bp. I wasn'teven prepared to look at it at 215bp."
Lloyds along with Australian REIT Scentre Group were theonly issuers to come to market on a day when others stayed onthe sidelines awaiting the conclusion of the Federal Open MarketCommittee meeting.
Together they raised US$1.75bn, taking the week's tally toUS$17.13bn in what ended up being a quiet day. 10-yearTreasuries ended up 3.7bp at 2.321% and the 30-year 0.4bptighter at 3.053%. The Dow ended down 31.44 points at 16,974.31.
The Federal Reserve ended its monthly bond purchase programand dropped a characterization of US labor market slack as"significant" in a show of confidence in the economy'sprospects.
Despite the strength of investor demand for subordinateddebt all year, credit strategists have spooked some investorswith forecasts of huge sub debt issuance by European banks as aresult of new Total Loss Absorbing Capital rules.
The Financial Stability Board is due to unveil its TLACproposals at a G-20 meeting in Brisbane in November.
Yet that wasn't the only thing making it a tough day forLloyds.
The performance of Barclays' 4.375% Yankee Tier 2subordinated 2024s also didn't help. They have widened about45bp to 240bp since their 195bp spread pricing on September 4.
Determining the right pricing reference was also difficultfor the UK bank, which didn't have any meaningful subordinateddollar debt of its own as a guide.
Some thought the UK bank might have been thrown off track bywidely varying spread levels on relevant outstanding Europeansubordinated dollar trades, ranging from T+190bp or G+200bp onSantander's 5.00% November 2023 subordinated notes to the 240bplevel on Barclays.
Santander is the parent of the UK's Abbey National, which isa main reference point for Lloyds.
The problem with the Santander/Abbey comp, according to somebankers, was that it trades richly due to a large amount of thebonds being held by the Spanish parent.
Some bankers not involved in the deal thought pricediscovery started out with a G+200bp level on theAbbey/Santander 5% November 2023 subordinated Yankee bonds.
Lloyds usually trades 5bp tighter than Abbey, which wouldtake the value to 195bp. About 10bp was added to that to accountfor the fact that the Abbey/Santander sub was at the bank leveland the new Lloyds deal was at the holdco.
That would suggest fair value of around 205bp for a new subdebt Tier 2 by Lloyds. At that level it appeared Lloyds hasprovided investors with a 20bp pickup.
In the scheme of things, that doesn't seem outlandish. WellsFargo had to pay 10bp on a US$2bn 30-year subordinated Tier 1note the day before, priced at 165bp on books of US$5bn.
The only other issuer in the market was Australia's ScentreGroup Trust, a REIT developed in June through the merger ofWestfield Retail Trust and Westfield Group's Australian and NewZealand management businesses.
The debut offering attracted US$2.6bn of orders after goingout with initial price thoughts of 110bp area. That wastightened in to 100bp area and was ultimately priced at 95bp andincreased to US$750m in size from an initial US$500m.
LLOYDS BANKING GROUP PLC
Lloyds Banking Group PLC, expected ratings Baa3/BB+/BBB+,announced a SEC-Reg USD benchmark 10-year (11/4/2024) subordinated tier 2 notes via Citigroup, Goldman Sachs, JPMorgan, Lloyds, Morgan Stanley and Nomura. UOP: GCP.
IPT: T+215bp area
PRICE GUIDANCE: T+225bp (the #)
LAUNCH: US$1bn at T+225bp
PRICED: US$1bn 4.50% 10-year (11/04/2024). At 99.435, yld4.571%. T+225bp.
BOOK: US$3.5bn
NIC: About 20bp (Using either the BNP or Abbey comp,subtract 5bp since Lloyds trades 5bp tighter, for fair value ofG+185bp. Then add 10bp for bank to holdco, for fair value ofG+195bp. Then add about another 10-12bp for fair value of aroundG+205-207bp)
COMPS:
BNP (Baa2/BBB/A) 4.250% October 15, 2024 at G+190bp
SANS (Baa2/BBB-/A-) 5.000% November 7, 2023 at G+190bp
SCENTRE GROUP TRUST
Scentre Group Trust (SCGAU), A1/A, announced a US$500m5-year 144A/Regs S senior unsecured notes. The activebookrunners include Bank of America, Citigroup, JP Morgan andRoyal Bank of Scotland. Settle: 11/05/2014.
IPTs: T+110bp area
PRICE GUIDANCE: T+100bp area (+/- 5bp)
LAUNCH: US$750m (upsized from US$500m) at T+95bp
PRICED: US$750m 2.375% 5-year (11/05/2019). At 99.439, yld2.495%. T+95bp. MWC+15bp. 1st Pay: 5/05/2015.
BOOK: US$2.6bn
NIC: Debut offering (Reporting by Mike Gambale and Danielle Robinson; Editing byShankar Ramakrishnan)
