Banco Popular Follows BBVA With Additional Tier 1 CoCo Bond Sale

Banco Popular Espanol SA (POP) is selling contingent convertible bonds as part of its most-junior layer of debt capital, becoming the second Spanish lender to issue the securities under new rules governing how they can be used to bolster balance sheets.

Popular, which lends mainly to Spain’s small- and medium-sized businesses, plans to issue 500 million euros ($676 million) of undated additional Tier 1 bonds that will convert to stock if its common equity Tier 1 ratio falls below 5.125 percent, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. Banco Bilbao Vizcaya Argentaria SA (BBVA) was the first Spanish bank to issue the new securities, selling $1.5 billion of perpetual bonds with a 9 percent coupon in April.

“We wanted to see the market develop so it’s good they’re issuing an innovative instrument,” said Satish Pulle, a portfolio manager at ECM Asset Management Ltd., which manages about $8.5 billion. “This one should appeal to a hedge-fund type of investor base.”

European regulators endorsed the Capital Requirements Directive in April as part of the Basel III regime being introduced in the region. It sets out the terms they want to see on additional Tier 1 securities, including the ability to absorb losses in a crisis.

Popular’s bonds will also convert to equity if the Madrid-based lender’s Tier 1 ratio calculated under different standards falls below 6 percent and the bank posts four quarters of losses resulting in a one-third reduction in capital and reserves, according to the person familiar with the matter.

Besides BBVA, the only other European lender that has issued additional Tier 1 bonds is Societe Generale SA, which sold $1.25 billion of 8.25 percent notes on Aug. 29.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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