Weaker Banks Pay Up to Regain Access to Riskiest-Debt Market

  • BBVA notes carry coupons about 2% higher than previous sale
  • Investors pay more attention to differences in banks' capital

The market for the riskiest bank debt is starting to open for Europe’s weaker lenders -- provided they are willing to pay up.

Banco Bilbao Vizcaya Argentaria SA sold 1 billion euros ($1.1 billion) of so-called additional Tier 1 bonds on Thursday, with a coupon of 8.875 percent, according to data compiled by Bloomberg. That’s about two percentage points more than the Spanish lender’s last offering of similar notes. BNP Paribas SA also pledged slightly higher coupons in a dollar-denominated sale last month.

Increased coupons in two of the first three AT1 sales since a two-month shutdown show how investors are now assessing banks’ capital levels on a case-by-case basis, rather than treating all lenders the same. Debt from the strongest banks also quickly rebounded following an industrywide selloff earlier this year, while notes from the very weakest lenders are lagging behind.

“Markets are still skittish and investors are tending to differentiate more,” said David Butler, a portfolio manager at Rogge Global Partners, which oversees about $35 billion of assets. The very weakest banks “may not have the luxury of coming to the market when they ideally want to,” he said.

‘Price Takers’

BBVA pushed ahead with the sale to maximize its additional Tier 1 capital, something it had previously committed to doing, said Erik Schotkamp, the bank’s capital and funding-management director.

“These are the ongoing market rates and we’re price takers,” he said. It is a “complex environment” because of economic concerns and regulatory uncertainty at the beginning of the year, he said.

An official at BNP Paribas wasn’t immediately available for comment on its bonds.

Along with higher coupons, BBVA and BNP Paribas also improved bond terms for buyers compared with previous sales. The changes increase incentives for the issuers to buy back the debt at the first call date, easing one of the main investor concerns that had closed the new-issuance market.

Wider Spreads

BBVA pledged to pay coupons of about 918 basis points above benchmark rates, if it doesn’t repay the debt at the first call date in 2021. That compares with a spread of about 660 basis points in a February 2015 issue.

“What’s positive on this is the back-end,” said Mikael Lundstrom, a fund manager at Evli Fonder AB in Stockholm, which manages 9.5 billion euros, including BBVA notes. “If you can be reassured that it’s going to be called, or if you’re happy with it yielding around 9 percent, then it takes away quite a lot of the downside risk.”

Additional Tier 1 notes tumbled earlier in the year amid concerns about capital levels at lenders including Deutsche Bank AG. Coupon payments on the bonds can be halted if banks run into difficulties. The European Commission has also proposed easing restrictions on payments, which would pare risks for holders.

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