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More AT1 bonds expected after strong showing by RBS, StanChart

By Will Caiger-Smith

NEW YORK, Aug 11 (IFR) - Issuance of risky Additional Tier 1 capital could be set for a revival after Royal Bank of Scotland (LSE: RBS.L - news) and Standard Chartered (HKSE: 2888.HK - news) printed large dollar deals that rallied in secondary trade.

The deals were the first AT1s from UK banks since the Brexit vote on June 23, and the juicy yields on offer attracted buyers despite broader concerns around the country's economic outlook.

They performed well in the aftermarket, giving participants another sign that the asset class is breaking free of the malaise that has afflicted it for much of the year.

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"Investors are finally waking up to the fact that the AT1 sector has underperformed this year and that there is considerable relative value to be had," said Mark Holman, CEO of TwentyFour Asset Management.

The Bank of America Merrill Lynch contingent capital index has bounced by 10.26 points to a dollar price of 99.05 since hitting a trough of 88.79 on February 12.

The February sell-off was driven largely by concerns that Deutsche Bank (LSE: 0H7D.L - news) , still in the throes of a vast restructuring, might not be able to pay coupons on AT1 debt.

But as such fears subside and buyers chase yield, the asset class is catching up to the broader credit rally.

Given the strength of investor demand, bankers said even the likes of Deutsche Bank might now be able to stage a comeback.

"They have the right brand and they need the capital - it wouldn't surprise me to see them do a transaction," said a FIG DCM (BSE: 502820.BO - news) banker.

"Since the Deutsche Bank scare in the first quarter, we've seen a consistent bull market. That hasn't manifested itself in AT1 until now."

MILESTONES

RBS's US$2.65bn perpetual non-call five-year deal was the biggest ever AT1 in US dollars. Investors placed US$16bn of orders for the deal, which priced at 8.625%.

StanChart (HKSE: 2888-OL.HK - news) secured the biggest book for a European bank AT1 so far this year. Investors placed US$17bn of orders for the US$2bn perp non-call 5.5-year deal, which priced at 7.5%.

Both deals will convert to equity if the issuer's Common Equity Tier 1 capital ratio falls below 7%.

StanChart took advantage of its strong name recognition among Asian private banks, adding a Reg S tranche to its deal.

UK banks had been rumored to be looking to access the market after reporting earnings, with bankers saying conditions were the strongest they had been in months.

"We chose the timing based on the supportive backdrop in global markets recently improvement in AT1 market dynamics since the dislocation earlier in the year," said Rupert Mingay, group treasurer at StanChart.

The deal also took advantage of improving investor sentiment towards the bank, he said.

"Many are viewing StanChart as having the worst of their loan losses behind them," said Holman at TwentyFour Asset Management.

Even RBS's announcement of a £2bn (US$2.6bn) first-half loss did not dent investor enthusiasm for its deal. Analysts said both banks had made good progress in restructuring.

"[Their results] highlighted both the progress they have made in their restructuring efforts as well as the challenges and headwinds they face," senior CreditSights analyst Simon Adamson said in a report.

"Both banks' capital ratios are well above minimum regulatory requirements, and both have substantial distributable items to support coupon payments."

RBS has now met its £2bn AT1 issuance target for 2016 and the majority of its total AT1 requirement. A spokesman said the bank currently has no plans to issue more AT1s.

StanChart now has just US$1bn-$2bn of AT1 left to raise by the 2019 deadline, according to Christopher Daniels, the bank's global head of capital management.

RELATIVE VALUE

Investors were attracted to the deals partly by the juicy fixed-rate coupons on offer.

But the decline in swap spreads since RBS and Standard Chartered were last in the market means the deals switch to a higher back-end floating rate if they are not called.

RBS's deal switches to a floating-rate coupon of mid-swaps plus 759.8bp if it is not called after five years, compared to a back-end coupon of 580bp for the 7.5% AT1 it issued last year.

StanChart's deal switches to a floating-rate coupon of 630.1bp over mid-swaps if it is not called after 5.5 years, compared to a back-end coupon of 488.9bp for its last deal.

"The one with the larger reset is more likely to be called or tendered for by the bank," said a buyside trader. "And if not, it resets to a higher coupon."

RBS's new bonds were trading 1.5 points above par on Thursday, while StanChart's were around 75bp above par.

But because of the higher yield to call - around 8.9% for RBS and 8.4% for StanChart - both banks' previous perp non-call fives also rallied around one point after the new deals priced.

By Thursday, RBS's 7.5% bonds were trading at 8.7%, while StanChart's 6.5% notes were trading at 8.07%. (Reporting by Will Caiger-Smith; Editing by Natalie Harrison and Marc Carnegie)