UBS AT1 foreshadows heightened dollar supply

(Corrects date of UBS (NYSEArca: FBGX - news) deals in paragraphs 16, 18)

By Alice Gledhill

LONDON, July 31 (IFR) - UBS shook the dormant European Additional Tier 1 market back to life on Friday with a deal that could herald a heightened period of dollar supply in the coming months.

UBS, one of the largest issuers of CoCos across AT1 and Tier 2, opened books on a high-trigger Reg S dollar AT1 only a day after Royal Bank of Scotland (LSE: RBS.L - news) announced its long-awaited inaugural trade.

"They are capitalising on good results; it's a clever move. If you have good results and the market is quiet, and you have a well established curve, why not?" said one banker.

The European market has been starved of AT1 issuance since the second week of June, when BNP Paribas (Xetra: 887771 - news) and Bank of Ireland both issued EUR750m trades. It is the first Reg S dollar AT1 since DNB Bank issued USD750m in March.

Bankers suggested the euro market is open to issuance, but dollars look more attractive on an economic basis.

IPTs for UBS's perpetual non-call 10-year notes started at 7.125% area. This was revised to 7% area as demand passed USD6bn.

The IPTs were in line with where the bank priced a USD1.15bn high-trigger permanent write-down AT1, callable after five years, in February. That bond was bid around 5.836% on Friday morning, according to Tradeweb prices.

The new deal, with expected BB/BB+ ratings, later launched in a USD1.5bn size at 6.875% on books over USD7.5bn via global coordinator and sole bookrunner UBS. There are 15 joint leads.

AT1 AWAKENING

Issuance from UBS and the prospect of RBS's deal have helped revive the AT1 market for European banks, after Tier 2 hogged the spotlight in recent months.

"By and large AT1 supply will pick up, but more into dollars," said one syndicate official.

"Obviously there will be some people who want to go to the euro domestic market, so we will see some supply there. But for those borrowers that can look across currencies, the euro doesn't look that competitive."

Royal Bank of Scotland is also angling for dollars, although in SEC-registered format. The roadshow for that trade starts Monday and issuance could follow the same week.

Italian lender Intesa is also strongly rumoured to be preparing an inaugural trade. It has met US investors in recent months but could also issue a euro tranche, according Michael Huenseler, head of credit portfolio management at Assenagon.

"It's a trade-off - the market is deeper in the US, but people know the name better here," he said.

The bond is not expected before September due to European holidays.

ROUND TWO

This is the second round of Additional Tier 1 capital issued at the group level for UBS, after a three-part deal in February.

Monday's results had teased the market with the promise of AT1 issuance and "inaugural TLAC-eligible debt" in the third quarter. AT1 capital is expected to count towards safety buffers known as total loss absorbency capacity to be set by the Financial Stability Board.

Like one of February's notes, today's PNC10 features a high trigger permanent writedown structure, meaning investors could see their holdings wiped out completely if the bank's Common Equity Tier 1 ratio falls below 7%. That ratio now stands at 14.4%.

While this structure prices wider than bonds with a temporary write-down format, most investors care more about the bank's ability to pay coupons, particularly for a rock-solid name like UBS.

The bank is once again employing an unusual greenshoe option, a tool borrowed from the equity market to help stabilise the bonds in the secondary market.

"I'm pretty sure investors factor this in, said one syndicate official. "Last time it helped the bonds trade up to two points up on the break." (Reporting by Alice Gledhill, editing by Julian Baker and Helene Durand)