PTSB opens new chapter for CoCos

* Permanent TSB (Berlin: IL0A.BE - news) prices Ireland (Other OTC: IRLD - news) first AT1

* Capital (Other OTC: CGHC - news) raise gets bondholders' seal of approval

* Investors rewarded by strong performance

By Helene Durand

LONDON, May 1 (IFR) - An inaugural Additional Tier 1 bond issue for Permanent TSB heralds a new dawn for the market. PTSB is using the funds to help fill a capital hole, demonstrating that AT1 instruments can also be used to meet shortfalls with private funds.

The 125m perpetual non-call six-year transaction, which was also the first ever from an Irish lender in the format, attracted more than 1.25bn of investor demand and was priced with an 8.625% coupon, tighter than initial price thoughts of the 9% area.

"To see AT1 fixed income investors strongly support a bank's capital plan as part of a larger capital package agreed with the regulators following the comprehensive assessment exercise is a big positive for the market," said Jonathan Gold, a managing director in Deutsche Bank (Xetra: 514000 - news) 's financial institutions group.

Since the inception of the AT1 market in early 2013, the instruments have mainly been used by strong institutions looking to bolster their balance sheets rather than as a way to plug capital holes. On the rare occasions when AT1s have been used to plug holes, the money involved was provided by governments rather than private investors.

"The AT1 transaction was part of a larger capital raise undertaken by PTSB to meet the shortfall identified under the ECB stress tests adverse scenario," said Gold.

"Permanent also placed 498m of equity as part of the package. Both transactions were very well received by the market."

PTSB was in effect nationalised after a 4bn bailout from the Irish government in 2011 and has struggled to follow larger rivals Bank of Ireland and Allied Irish Banks back to profitability due to a large stock of loss-making mortgages.

The adverse scenario under the ECB stress tests showed that the bank had a 855m capital shortfall.

The transaction came at a price for PTSB. Banco Popular Espanol was the last issuer to pay up to raise Additional Tier 1. It printed a 750m perpetual non-call five-year bond issue at 8.25% in February this year, which was bid at 7.8% on Friday.

LEAP OF FAITH

Many market participants away from the deal were impressed by its outcome, especially given the volatile market backdrop.

"This seemed to go well and investors clearly continue to like the Ireland recovery story," one banker said.

"To get more than 1bn of demand for such a small deal is pretty impressive, especially given that I don't think it has the broadest following within the investor community."

The transaction was not only impressive for attracting such demand for a small and tricky credit but also because it is located in a jurisdiction where the regulators had no qualms about imposing severe losses on bondholders during the financial crisis.

However, investors that believe in the Irish story have made good money in recent years, even in subordinated debt. For example, a 250m Tier 2 issue for Bank of Ireland was priced at the end of 2012 at a 10% yield and was bid at a yield of 4.261% on Friday.

PTSB opted to use the publicly syndicated route rather than a club deal as it believed there would be significant investor appetite for an AT1 issue.

"This was borne out by the level of investor interest post the announcement of the roadshow, where we spoke to 60 potential investors, and ultimately saw 150-plus investors looking to participate in the book," said Paul Byrne, group treasurer at PTSB.

"With each one of the 150-plus having undertaken their own credit analysis, this now allows them to support the transaction in the secondary market as well as to participate in any future issuance from ourselves. We could not have achieved this through a club deal."

TRADING UP

Secondary trading in the bond supported that argument. It was bid at a cash price of 101.5 and a yield of 8.292% on Friday morning, according to Thomson Reuters data.

According to Byrne, there were no investor questions in relation to Irish sub debt in the depths of the crisis.

Hedge funds bought more than half the trade at 52%. Byrne said the rest was sold to fund managers at 32%, banks at 9% and others with the remainder. UK investors took 81%, US offshore 9%, others 6%, and Irish buyers 4%.

Deutsche Bank was structuring adviser and co-ordinator, alongside Davy as joint lead manager (no books).

The bond will convert into equity if PTSB's Common Equity Tier 1 ratio falls below 7%. According to Byrne, the 7% trigger had to be incorporated in order for the bonds to be included in its capital plan. The lender's CET1 ratio was 14.2% on a transitional basis at the end of 2014. (Reporting by Helene Durand, Editing by Matthew Davies, Gavin White)