BBVA’s Tier 1 Deal Fuels CoCo Bond Sales as Borrowing Costs Fall

Banco Bilbao Vizcaya Argentaria SA is marketing its second sale of contingent convertible bonds as demand for high-risk debt pulls down borrowing costs.

The Spanish lender plans to issue 1.5 billion euros ($2 billion) of additional Tier 1 notes in euros that will be priced to yield 7 percent, according to a person familiar with the deal. The average yield on CoCos, which are written off or convert to equity if a lender’s core capital falls below a preset level, declined 15 basis points this year to 6.83 percent, according to Bank of America Merrill Lynch’s High Yield Contingent Capital Index.

Additional Tier 1 notes offer higher yields because they comply with new European Union rules designed to make investors, rather than taxpayers, contribute to a bank’s financial rescue. BBVA was the first European lender to issue the securities when it sold $1.5 billion of 9 percent notes in April, which, like the new bonds, allow it to limit or stop coupon payments if losses erode capital buffers.

“BBVA was slightly tarnished with the Spanish brush but this time markets are in better health and the perception of BBVA has changed,” said Mark Holman, chief executive officer of TwentyFour Asset Management LLP in London, which oversees about $3.9 billion of fixed-income assets. “BBVA’s fundamentals are very solid and there is a lot of capital between holders and the various triggers in the deal.”

The Bilbao-based bank’s new Tier 1 bonds will convert to equity if its capital ratio falls to 5.125 percent or lower, according to the person with knowledge of the deal. BBVA’s capital exceeds that threshold by more than 19 billion euros after more than doubling its core capital base since 2007, according to a company presentation this month.

Tier 1 Issuance

BBVA is the second lender to issue additional Tier 1 bonds this year after Credit Agricole SA priced $1.75 billion of the securities on Jan. 15, according to data compiled by Bloomberg. Six European banks have sold a total of $12.6 billion of the debt since the market opened last year, the data show.

The 9 percent securities issued by BBVA in April now yield 6.88 percent, according to data provided by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“A new issue of this type makes sense for BBVA” because it’s a substitute for more-expensive equity, according to John Raymond, an analyst at CreditSights Inc. in London. The additional Tier 1 securities currently amount to about 0.5 percent of the lender’s assets weighted by risk out of the permitted 1.5 percent, he said.

Credit Agricole’s 7.875 percent CoCo notes, which will be temporarily written down rather than convert to equity if triggers are breached, now yield 7.3 percent.

UBS AG issued 2 billion euros ($2.7 billion) of Tier 2 contingent bonds due February 2026 last week. The notes pay a 4.75 percent coupon and carry a 5 percent trigger, according to data compiled by Bloomberg. Tier 2 CoCos are less risky than Tier 1 debt because coupon payments are mandatory and the notes have a set maturity.

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