Santander, Danske take AT1 market by storm as coupons hit new lows

By Aimee Donnellan and Helene Durand

LONDON, March 5 (IFR) - Banco Santander (Berlin: BSD2.BE - news) and Danske Bank (Other OTC: DNSKF - news) are taking the European Additional Tier 1 market by storm, attracting multi-billion order books for their inaugural transactions as the market for high-risk loss absorbing bank bonds hots up and coupons reach new lows.

The two deals follow hot on the heels of Nationwide Building Society, which priced an inaugural GBP1bn perpetual non-call 5.25-year Additional Tier 1 (AT1) trade on Tuesday after attracting some GBP11bn of demand.

It is the first time that two banks have gone head to head in Europe to sell AT1 debt, and the latest sign that investors simply can't get enough of a product they said they would never buy.

"The market for AT1 has gone hell for leather, investors can't get enough of this product," a syndicate banker said. "The investor base is expanding rapidly with each new deal that comes to market and everyone is looking, whether it's Asian private banks, US funds, or European institutional accounts."

At the latest update, interest for Santander's perpetual non-call five-year issue was more than EUR17bn from over 820 investors, while demand for Danske was described by a lead as "overwhelming".

"There is an awful lot of momentum buying and investors are loving these deals that yield anything between 6% and 8% where they feel there is a low probability, at least in the near term, of anything bad happening to them," said a fund manager.

Both Santander and Danske were able to tighten guidance on their EUR1.5bn and EUR750m deals as demand poured in.

Santander will price its transaction with a 6.25% coupon, having initially marketed the deal at a mid/high 6% yield. Danske, meanwhile, will price at 5.75%, tighter than the early 6% area thoughts.

HOW LOW CAN YOU GO?

The launch levels show just how far the market has come in only a short time. When BBVA priced the first European AT1 deal last year, a dollar trade, it had to pay 9%.

When it returned to the market in February 2014, this time in euros, it paid a mere 7%. That EUR1.5bn perpetual non-call five-year deal has since tightened to 6.5%, and was used as the best pricing point.

Danske Bank's issue is also breaking new ground, as the first AT1 issue from a European bank to come with a coupon below 6%. Bankers away from the deal thought this was tight, although it did not seem to impact investor demand.

"Although a Nordic (SES: MR7.SI - news) bank,performance has been much weaker than that of its Swedish and Norwegian competitors and we think it should come with a coupon of close to 7%, although we hear it will probably have a low 6% coupon, which in our view offers little value," CreditSights analysts wrote in a note yesterday.

They said that Nationwide (LSE: CCDS.L - news) , which priced at 6.875%, also looked rich. Nevertheless, asset managers took 66% of the deal, while hedge funds and private banks bought 18% and 8%, respectively. The bond had climbed to 101.71/101.75 by Wednesday morning, according to Tradeweb, having priced at 100.014.

As with previous AT1 deals, the new bonds not only include loss absorption features - conversion into equity in the case of Santander and a temporary write-down for Danske - but also a mechanism that prevents the banks from paying on their coupons if they breach a certain capital level.

"Investors do ask a lot what will happen when the bank ceases to meet its combined buffer and what it intends to do in terms of paying coupons versus paying dividends," said a capital solutions specialist. "A lot of it is about trust in the issuer and management and the type of remedial action they intend to take and whether they will respect investor hierarchy."

It seems that Santander, which has previously angered investors with its aggressive approach to liability management, was able to regain their trust.

"The fact that a bank like Santander which has been unfriendly to bondholders in the past can issue says a lot about the market," said the fund manager.

Lead managers on Santander are Bank of America Merrill Lynch, Citigroup (NYSE: C - news) , Santander and UBS (Xetra: UB0BL6 - news) . Under the terms of the deal, the bond will trigger if the bank's Common Equity Tier 1 (CET1) ratio falls below 5.125% at the bank or group level.

As of the end of 2013, Santander's CET1 ratio stood at 10.45% at the group and 12.26% at the bank level.

Bank of America Merrill Lynch, BNP Paribas (Milan: BNP.MI - news) , Danske Bank, Goldman Sachs (NYSE: GS-PB - news) , HSBC and JP Morgan (Other OTC: JPYYL - news) are leading the Danske issue, which will be temporarily written down if the issuer's and/or the group's CET1 ratio falls below 7% on a transitional basis.