* Investors become more selective as AT1 pool grows
* Weaker names and repeat issuers could face uphill battle
* Some place issuance plans on hold
By Alice Gledhill
LONDON, Sept 18 (IFR) - Banks looking to sell the riskiestform of debt could be in for something of a wake-up call asinvestors, increasingly spoilt for choice, stop chasing everynew deal.
ABN AMRO this week priced its first ever Additional Tier 1issue, a 1bn 5.75% perpetual non-call five-year that attractedaround 3.5bn of demand and disappointed market participants whohad expected a blockbuster trade and a 1.25bn to 1.75bn size.
Demand for the issue was a far cry from the market's earlierdays when order books frequently topped 10bn or more asinvestors jostled for allocations, and raises questions as tohow future issuance will be digested.
"If you want exposure to the asset class, you don't have tochase every deal that comes along and people can afford toignore some of the new trades," said Dierk Brandenburg, seniorcredit analyst at Fidelity. "There are hardly any first timeissuers left while new deals don't offer a real premiumanymore."
Much of this year's 30bn of AT1 supply has come fromnational champions such as ABN. And this has given investorsscope to be somewhat more discriminating and demanding.
For banks that have multi-billion Additional Tier 1 targets,this could mean that the equilibrium swings back in favour ofinvestors.
Intesa Sanpaolo has said that it wants to raise 4bn by theend of 2017. Banks like HSBC and BNP Paribas have even biggertargets. The UK bank is targeting US$6-8bn a year until 2021while BNPP is aiming to issue 1bn to 2bn a year until 2019.
One of the reasons why the shine has come off the assetclass is because pricing has come down substantially sinceissuance started in 2013.
"Investors are not buying these deals for the 1-2 pointsperformance on the break and it's become more of a carry marketwhen you can clip a coupon," said a head of FIG syndicate. "TheAdditional Tier 1 market has matured a lot and it's become moresocially acceptable to own."
For example, a 1.5bn 5.5% perpetual June 2020 for Rabobankpriced in January this year at par was quoted at a 5% yield onFriday and was bid at 101.95.
MOVING TARGETS
This is not the only hurdle. Incoming rules around MinimumRequirement for Own Funds and Eligible Liabilities (MREL) andTotal Loss Absorbing Capacity (TLAC), in particular, posehurdles to forecasting capital needs and banks expect theircapital projections to change at year-end, Morgan Stanleyanalysts wrote in a note this week.
The evolving regulatory backdrop makes life more difficult,not only for issuers but also for investors, and can weigh onappetite.
"The pressure on bank capital and RWAs remains constant,"said Gildas Surry, a portfolio manager at Axiom AlternativeInvestments.
For example, market participants still do not know whetherMaximum Distribution Amount (MDA) buffers, which can turn offAT1 coupon payments, will be reduced by bank-specific capitalrequirements known as "Pillar 2".
Surry also pointed to the recent flow of negative updatesaround other factors impacting AT1 capital such as risk-weightfloors, the supervisory review and evaluation process ("SREP")and domestic buffers.
"This results in more differentiation across names andinvestors have to be more selective."
SURVIVAL OF THE FITTEST
But it is not just repeat well-known issuers that are likelyto see the pendulum swing further away from them.
Weaker banks and those with aggressive yield targets mayfind it increasingly difficult to drum up demand after investorshave gorged on almost 90bn of supply from European banks since2013.
"I dare not think what would have happened if it had been abank with a weak profile trying to do AT1 in that market," saida head of FIG DCM. "ABN managed to get a solid trade away,helped by its name. They didn't pay up to get it done, butclearly, this was no blockbuster."
ABN priced the BB/BB+ issue at 5.75% in a tricky market thatwas nervously waiting on whether the US Federal Reserve wouldraise rates or not.
Even when conditions were more stable earlier this year,weaker credits such as Banco Popular Espanol and Permanent TSBopted to place AT1 away from the public market, payingrespective coupons of 8.250% and 8.625%.
Some do question how banks will fare if the market backdropremains soggy and the hunt for yield that was so prevalent diesdown.
Spanish lenders Caixabank, Bankia and Sabadell are allseeking to issue AT1 when market conditions allow, according toone investor, but Greek-led volatility has caused difficulties.
"They've got a threshold and it's not there yet," he said.
Germany's NordLB mandated banks for an AT1 bond in Aprilthis year but backed away due to the high coupon required to geta deal away. Bankers say it is still intending to bring thetrade but may need to be more flexible on price.
(Reporting by Alice Gledhill, editing by Helene Durand andSudip Roy)
HSBC Holdings (HSBA)
