* Six-times subscribed book highlights hunt for yield
* Spanish 10yr yields at 2yr low, but unemployment over 27%
* Banks wait for EBA standards to sell temporary write-downs
By Aimee Donnellan
LONDON, May 3 (IFR) - A USD9bn-plus order book for BBVA's
Additional Tier 1 bond this week, at a time when economic
fundamentals are at their worst, has proved that the hunt for
yield is transcending any fears about a potentially calamitous
market correction down the road.
The deal, the first to comply with the Capital Requirements
Directive (CRD IV), was unexpectedly driven by European
accounts, who found the 9% coupon irresistibly high.
"The strength of the technicals are currently outweighing
the economic fundamentals, which is leading to demand for yield
in the market," said Mark Geller, head of European financial
institutions syndicate at Barclays.
For the issuer, the timing was perfect.
Spanish 10-year yields dropped to 3.95% this week, falling
below 4% for the first time since September 2010, as central
bank easing across the globe drives a widespread risk-on
mentality across credit markets.
From an investment perspective, however, the underlying
economic conditions should actually be a deterrent for
structures like Tier 1, where investors run the risk of being
converted into equity at best, and intense volatility in
secondary if there is a market correction.
Spain is still plagued by negative growth and
record-breaking unemployment above 27%, both of which are
unlikely to improve in the near term.
"Getting USD10bn for a high-yield product like BBVA, which
is not even rated by S&P and where the language is very vague
and the structure is complex, shows there is a massive demand
for yield," said a hedge fund manager.
"But investors are just looking at the coupon, and not the
ROCK AND A HARD PLACE
The problem for investors is that sitting on the sidelines
has its own set of problems, especially when analysts worried
about a correction are struggling to pinpoint an event that will
"Investors have two options in this market: sit on your
hands and wait for a correction that may not happen; or buy some
of these instruments and keep a wary eye on the market," said
Robert Montagu, a senior financials analyst at ECM.
The coupon on the BBVA deal was a fair price compared to
where other subordinated bonds were trading, and the fact that
the bond converts to equity is much more appealing than the
permanent 100% write-downs on other high-trigger CoCos, said
The USD1.5bn bond will convert into equity if BBVA's Core
Equity Tier 1 ratio falls below 7%, meaning investors have a
buffer of more than 400bp from the current 11.2% level.
The complex structure of the bond, rated BB- by Fitch, was
not a deterrent either. It includes four different trigger
points to reflect the requirements of the European Banking
Authority, the Spanish regulator, and Basel III rules, but 7% is
"Three [of those] are transitory, so it's possible that
investors will end up with just the CRD IV-related trigger over
time," said Erik Schotkamp, BBVA's capital and funding
The end result exceeded the bank's expectations on size,
price, and demand, and released almost 30bp of core capital.
WRITE-DOWN, WRITE-BACK NEXT?
Lead managers BBVA, Bank of America Merrill Lynch, Goldman
Sachs and UBS said the 9% pricing level was an attractive
benchmark for further issuance in the sector, and others agree
that more will follow, even if further bouts of volatility
"If you believe the euro is here to stay, then you will buy
deals like this," said Jorge Alegre, a capital markets lawyer at
Linklaters in Madrid
"Accounts in Asia and institutional European investors are
taking a view that Spain is unlikely to leave the eurozone
despite its economic difficulties."
The structure of other deals, however, is still uncertain.
Some bankers say other issuers are likely to favour a
temporary write-down instrument rather than straight equity
conversion. However, they are unlikely to do so before the end
of June at the earliest, when the EBA is expected to publish its
technical standards that will provide clarity on how temporary
write-down structures will work.
DCM bankers and syndicate officials say that with clarity
from the Capital Requirements Regulation (CRR), the market
conditions are ideal for future issuance.
"The success of this trade will encourage other bank issuers
to capitalise on current market conditions," said Peter
Jurdjevic, head of the balance sheet solutions team at Barclays.
(Reporting by Aimee Donnellan, editing by Philip Wright,
Natalie Harrison and Julian Baker)