* Investors place more than USD35bn of orders for topEuropean bank capital
* Growing market offers clearer pricing guidelines
* Volatility potential threat to asset class
By Danielle Robinson and Helene Durand
LONDON, Dec 6 (IFR) - Barclays and Credit Suisse laid torest any doubts about the strength of global investor demand forAdditional Tier 1 capital from European banks when theyattracted the US dollar equivalent of more than USD35bn ofdemand for their bonds in the past week.
Barclays, fresh from its blowout USD2bn 8.25% perpetualnon-call five-year Additional Tier 1 in November, became thefirst bank to show that the market in euros for the equity-likesecurities is as deep as that in US dollars.
The offering attracted an impressive EUR12bn of orders for aEUR1bn 8.00% perpetual non-call seven.
Meanwhile, an avalanche of USD19bn of orders descended uponCredit Suisse for its USD2.25bn 7.5% perpetual non-call 10-yearAT1.
Together they proved demand for the high-risk securities hasexpanded beyond what many thought possible.
As recently as September, Banco Popular issued just EUR500mof a perp non-call five Additional Tier 1 on EUR1.5bn of demand,while Credit Agricole issued a USD1bn 20-year non-call five CoCoTier 2 that only found around USD250m of US investor interest.
"Previously the question was: can it be done? Now thequestion is: how much can be done?" said Chris Tuffey, head ofEuropean debt syndicate in London at Credit Suisse.
The size and strength of the global investor base for suchsecurities had been one of the greatest sources of concern forEuropean bank treasurers, as they stare at the mountain of AT1capital they need to sell in order to comply with Basel IIIcapital and leverage ratio requirements.
According to analysts at JP Morgan, based on a peer group of25 European banks, total issuance of Additional Tier 1 capitalis likely to reach EUR31bn in 2014.
But the stable interest rate backdrop and the fact thatthese securities are being sold at levels usually seen on TripleC rated junk bonds are pushing investors from across the worldto take on the paper.
Investor interest was also helped by clarification ofEuropean Capital Requirement Regulation rules, and the kind ofstructures allowed under each jurisdiction.
"We now have the clarity that we need to build this criticalasset class for the European banking sector," said StevenPenketh, managing director in Group Treasury at Barclays.
The rising number of AT1 transactions is another factor thathas helped investor interest, as the product becomes morefamiliar.
In late November Nationwide issued GBP500m perpetual CoreCapital Deferred Shares, while BBVA, Banco Popular, SocieteGenerale, Barclays and Credit Suisse now all have outstandingAT1 securities. The product has now been issued in US dollars,euros and Swiss francs.
"A year and a half ago it was much more difficult to tradein and out of these things," said a FIG banker in New York.
"But now you have a bigger universe of deals to play with,so that means you can make assumptions on what is the cheapestamong them and profit from dislocations in the market."
DIFFERENT STROKES
Price discovery has also improved for different features inAT1 transactions.
AT1 securities from UK banks have to convert to equity if abank's common equity Tier 1 to risk-weighted assets ratio dropsbelow 7%, and dividend payments on the AT1 securities can bestopped at a bank's discretion, without having to halt equitydividends at the same time.
Credit Suisse's AT1s, on the other hand, have a much lowertrigger - 5.125% - as well as dividend stoppers, but arepermanently written down if the trigger is tripped.
European investors clearly prefer the equity conversionfeature.
"Having the equity conversion structure [as opposed to apermanent write-down] helped to build incremental demand fromEuropean investors," said Penketh.
"This is more a volume driver as opposed to a pricingadvantage at present. When the market has matured, we wouldexpect these contrasting structural features to be assessed on arelative value basis, generating a clear pricing differential."
US investors, in contrast, value the dividend stopper -which helped Credit Suisse price at its AT1s last week at 7.5% versus the 8.25% on the Barclays' US dollar AT1 in November.
"Our concern with these kinds of securities is not alwaysthe buffer to the trigger, but the buffer to the coupon beingturned off at the discretion of the bank," said Jim Switzer,global head of credit trading at Alliance Bernstein in New York.
"These banks don't want to turn the coupons off if it meansthey have to also stop paying dividends on equity, so having thedividend stopper in a deal is very valuable to us."
Hedge funds still dominate some trades - about half ofNationwide's deal, for instance, about a third was sold tohedgies - but Barclays and Credit Suisse found solid recurringinterest among 10 to 15 top global asset managers - in both USdollars and euros.
Incremental demand has built especially in euros, althoughGermany and the Netherlands could do with some investordevelopment, say bankers.
In the Barclays euro trade, fund managers took 61%, hedgefunds 21%, private banks 9%, insurance/pension funds 5%, banks2% and others 2%.
In the US more traditional fixed income investors aretreating the recent US Tier 1 and 2 CoCos like high-yield bonds.
"There's a lot of high-yield investors getting their handsaround these structures," said one US investor. "These AT1s areoffering Triple C yields for what we don't consider to be TripleC risk."
The trades have been priced to perform. "They have to leavemeat on the bone to get people to buy it and own it," said onemarket participant in New York.
CONTINUING RUSH
The rush in both euros and US dollar AT1s is expected tocontinue in the months to come, as banks anxiously work to getahead of the inevitable return of rate volatility.
US bank capital Tier 1 securities were the worst performingfixed income asset class from May to September when Fed taperingfears were at fever pitch.
The fixed-to-floating structures, however, have shown anability to recover lost ground and with the AT1s offering a50bp-90bp pickup in yield versus US bank perpetual preferreds,US investors feel they have adequate cushion against any creditspread widening if bond prices plunge gain in tandem with raterises.
"If you expect spreads to tighten as banks continue toimprove their balance sheets and if the AT1 is priced with ahigh enough reset rate at the back-end to alleviate extensionrisk, then theoretically the securities should still hold theirvalue in a steadily rising rate environment," one investor said.
Barclays (BARC)
