Lloyds pays up on Tier 2 bonds in quiet high-grade day

By Mike Gambale and Danielle Robinson

NEW YORK, Oct 29 (IFR) - Fears of a deluge of subordinated debt issuance from European banks in coming years was one of the factors that weighed on Lloyds Banking Group's efforts on Wednesday to price its first Tier 2 Yankee bond in four years.

Lloyds had to price its US$1bn 4.5% 10-year subordinated deal wider than initial price thoughts to place the bonds.

The deal priced at 225bp over Treasuries on a solid book of US$3.5bn, but only after the bookrunners revised the 215bp whispers to 230bp to gather enough interest and then going out with guidance at 225bp.

Investors said Lloyds also decided to keep the deal at US$1bn in size, rather than try to grow it by another US$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't even prepared to look at it at 215bp."

Lloyds along with Australian REIT Scentre Group were the only issuers to come to market on a day when others stayed on the sidelines awaiting the conclusion of the Federal Open Market Committee meeting.

Together they raised US$1.75bn, taking the week's tally to US$17.13bn in what ended up being a quiet day. 10-year Treasuries ended up 3.7bp at 2.321% and the 30-year 0.4bp tighter at 3.053%. The Dow ended down 31.44 points at 16,974.31.

The Federal Reserve ended its monthly bond purchase program and dropped a characterization of US labor market slack as "significant" in a show of confidence in the economy's prospects.

Despite the strength of investor demand for subordinated debt all year, credit strategists have spooked some investors with forecasts of huge sub debt issuance by European banks as a result of new Total Loss Absorbing Capital rules.

The Financial Stability Board is due to unveil its TLAC proposals at a G-20 meeting in Brisbane in November.

Yet that wasn't the only thing making it a tough day for Lloyds.

The performance of Barclays (LSE: BARC.L - news) ' 4.375% Yankee Tier 2 subordinated 2024s also didn't help. They have widened about 45bp to 240bp since their 195bp spread pricing on September 4.

Determining the right pricing reference was also difficult for the UK bank, which didn't have any meaningful subordinated dollar debt of its own as a guide.

Some thought the UK bank might have been thrown off track by widely varying spread levels on relevant outstanding European subordinated dollar trades, ranging from T+190bp or G+200bp on Santander's 5.00% November 2023 subordinated notes to the 240bp level on Barclays.

Santander is the parent of the UK's Abbey National, which is a main reference point for Lloyds.

The problem with the Santander/Abbey comp, according to some bankers, was that it trades richly due to a large amount of the bonds being held by the Spanish parent.

Some bankers not involved in the deal thought price discovery started out with a G+200bp level on the Abbey/Santander 5% November 2023 subordinated Yankee bonds.

Lloyds usually trades 5bp tighter than Abbey, which would take the value to 195bp. About 10bp was added to that to account for the fact that the Abbey/Santander sub was at the bank level and the new Lloyds deal was at the holdco.

That would suggest fair value of around 205bp for a new sub debt Tier 2 by Lloyds. At that level it appeared Lloyds has provided investors with a 20bp pickup.

In the scheme of things, that doesn't seem outlandish. Wells Fargo had to pay 10bp on a US$2bn 30-year subordinated Tier 1 note the day before, priced at 165bp on books of US$5bn.

The only other issuer in the market was Australia's Scentre Group Trust, a REIT developed in June through the merger of Westfield Retail Trust and Westfield Group's Australian and New Zealand management businesses.

The debut offering attracted US$2.6bn of orders after going out with initial price thoughts of 110bp area. That was tightened in to 100bp area and was ultimately priced at 95bp and increased 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 (NYSE: C - news) , Goldman Sachs (NYSE: GS-PB - news) , JP Morgan (Other OTC: MGHL - news) , Lloyds, Morgan Stanley (Xetra: 885836 - news) 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, yld 4.571%. T+225bp.

BOOK: US$3.5bn

NIC (NasdaqGS: EGOV - news) : About 20bp (Using either the BNP (Paris: FR0000131104 - news) or Abbey comp, subtract 5bp since Lloyds trades 5bp tighter, for fair value of G+185bp. Then add 10bp for bank to holdco, for fair value of G+195bp. Then add about another 10-12bp for fair value of around G+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$500m 5-year 144A/Regs S senior unsecured notes. The active bookrunners include Bank of America, Citigroup, JP Morgan and Royal Bank of Scotland (LSE: RBS.L - news) . 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, yld 2.495%. T+95bp. MWC+15bp. 1st Pay: 5/05/2015.

BOOK: US$2.6bn

NIC: Debut offering (Reporting by Mike Gambale and Danielle Robinson; Editing by Shankar Ramakrishnan)