Echoes of February as AT1 market takes another leg down

By Alice Gledhill

LONDON, June 27 (IFR) - European banks' Additional Tier 1 debt took another knock on Monday as the economic and political fallout of Brexit hung over markets, triggering the most violent price action since the first quarter.

Additional Tier 1 bonds were quoted 50bp to a point lower on Monday morning as the asset class remained under pressure after Friday's losses, with UK names inevitably among the worst hit.

A Barclays (Swiss: BARC.SW - news) £1bn 7.875% AT1 callable in 2022, for example, was quoted at 88.30 by late morning. Spreads on Tier 2 bonds were seen 10bp-15bp wider.

The volatility has prompted speculation as to how long primary will remain closed and whether a repeat of the first-quarter sell-off is on the cards.

European banks have not been immune from investors' risk aversion, and Deutsche Bank (LSE: 0H7D.L - news) 's AT1s, among the worst hit in February's sell-off, were quoted between 76 and 81.

Bank of America Merrill Lynch's CoCo index jumped from 6.028% to 6.33% last Friday.

"We're very cautious. The temptation is to buy on the dips, but it depends on your medium-term outlook. On Friday, you could have made a lot of money, but we haven't seen many offers," said one investor.

Most real money investors went into the vote relatively neutral and with high cash balances, he added, limiting losses and containing the panic seen in equity markets.

The outlook for financial supply is highly uncertain, however.

One DCM banker argued that demand for yield would help the market for higher beta assets reopen.

"I sense investors will get frustrated sitting on too much cash. If there nothing is fundamentally wrong with the underlying credit, valuations need to reflect that," he said.

But issuers will not print at any price, he added. "If you do something that is destroying shareholder value, that is the worst thing you can do."

TOO VOLATILE

The investor raised the prospect of seeing no further supply until after the summer, citing the prevailing risk-off mood and spread volatility.

"Why should I buy a new issue when Tier 2 is moving 10bp-30bp a day? There would have to be a huge NIP there."

The possibility of RBS (LSE: RBS.L - news) issuing Additional Tier 1 capital, having stated its intention to print £2bn this year, looks impossible for now unless it was to pay 10.50% or 11%, he said.

"But the cost of equity is going up, so maybe that doesn't look quite so bad. You'd hope it calms down over the next six months. But a bit like the Italians, if someone like RBS tried to push out an AT1 now, it would be seen as a sign of distress."

Disrupted market access could be much more serious for parts of the periphery, given the ongoing questions over how well capitalised some of the banks are.

Spanish and Italian AT1 bonds were badly hit on Friday as the prospect of contagion was felt on European credit beyond Britain, riling banks' treasury teams. A UniCredit (EUREX: DE000A163206.EX - news) 6.75% AT1 callable in 2021 is bid at 75.40, down from 83.40 last Thursday.

The Italian government on Monday confirmed that it was considering options to help its banks and prevent further falls in their share prices.

Analysts warn that European banks will likely suffer subdued earnings growth and rising cost of equity amid growing political risks, Reuters reported, prompting a slew of rating and target cuts on bank stocks. (Reporting by Alice Gledhill; Editing by Helene Durand, Philip Wright)