Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
The European bank debt market was boosted on Wednesday by strong demand for a new issuance from Barclays, a week after UBS re-entered the market with its biggest sale of additional Tier 1 bonds in five years.
British lender Barclays received demand from investors for a more than $13 billion AT1 bond that could be repaid in June 2030, according to an investor. Due to strong demand, the yield on the debt securities was reduced from 10.5 percent to about 9.6 percent.
The market for AT1 bonds, which are intended to be converted into equity or written off if banks get into trouble, was hit hard in March by the collapse of Credit Suisse, which resulted in $17 billion worth of AT1 bonds were destroyed.
Investors were initially wary of re-entering the market after the products suffered their biggest losses since their launch following the global financial crisis.
But banks, including BNP Paribas in France and BBVA in Spain, have slowly started issuing AT1 bonds and found willing buyers. Last week, Société Générale became the latest lender to re-enter with a $500 million offer.
Analysts were eagerly awaiting the first AT1 bonds under Swiss law as a test of investor appetite because Swiss financial regulator Finma’s decision to write down Credit Suisse’s bonds was so controversial.
The move has led to at least $9 billion in legal claims after bondholders argued that strict conditions in their contracts that triggered the wipeout process had not been met.
Still, last week UBS received $36 billion in demand to issue a $3.5 billion bond, prompting the bank to increase offered yields to 9.25 percent from the original over 10 percent to lower.
This was the largest sale of AT1 bonds by a European bank since March 2018 and one of the five largest on record, according to LSEG data.
“AT1 demand has been incredible,” UBS CEO Sergio Ermotti told CNBC on Wednesday. “Confidence is not only returning at UBS, I would say it is also a signal to the Swiss financial system.”
The UBS sale increased AT1 borrowing this year to $53.5 billion, according to LSEG data – significantly less than the previous four years, but above the $49 billion in 2018.
Analysts said the asset class’ recovery was helped by the European Central Bank and Bank of England quickly reassuring investors that they would not suffer the same fate as those holding worthless positions in Credit Suisse bonds.
“The AT1 market in general has recovered very significantly and I think investors are very happy with the regulatory regime in Europe and the UK,” said Tim Kurpis, portfolio manager for US investment grade bonds at AllianceBernstein.
Barclays declined to comment.
Additional reporting by Stephen Morris
Source : www.ft.com