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Investor Capital Still Flows Into Banks
05-12-2008 | Source: EuroWeek - Click here to take out a FREE Trial
People & Companies in the News
The keen appetite of retail investors around the world for pumping hybrid capital into banks showed no signs of abating this week as yet more tier one debt was sold to private banking networks.
In the past few weeks, many capital-hungry banks have been able to sell large transactions, defying doubters about the depth of the retail bid for tier one capital.
This week Sumitomo Mitsui Financial Group priced a $1.8 billion deal, said to be the largest ever Eurodollar retail-targeted tier one issue.
Daiwa Securities SMBC, Goldman Sachs, JP Morgan and UBS got the perpetual non-call five year 2.5 times oversubscribed.
Last week a crop of European retail-targeted transactions should be priced, including deals for Deutsche Bank and KBC.
Deutsche is set to price a self-led perpetual non-call 10 year
upper tier two deal, with the option to convert to tier one.
The deal is said to have gone well and by last night (Thursday), the order book was around Eu1.25bn, with guidance at 8%. While retail investors are expected to participate, the longer call date means institutional buyers are likely to buy the deal too.
KBC will be pricing a perpetual non-call five issue. Goldman Sachs, KBC and Lehman Brothers are marketing it at a level of the low 8% range, and market sources believe the leads will aim to price at 8.125%. Again, demand has been strong, with orders reaching €1.25 billion last night.
Eureko, the Dutch insurance group, is also marketing to the private banking networks, although the true retail nature of the issue has meant momentum has been slower to build.
The subscription period for the deal ends on May 15. The perpetual non-call five year bond has a coupon fixed for life with no step-up. It is being marketed with coupon guidance around 8.375%. The book stands north of €175 million.
Pricing wins hearts
The attractiveness of the retail market has been evident over recent weeks, with transactions
from the likes of U.K. hedge fund manager Man Group getting done.
This contrasts with the institutional market, where there has not been a tier one issue since Crédit Agricole’s €850 million perpetual non-call 10 year deal six weeks ago.
Apart from the usual attraction that retail deals offer more equity-like capital, since they can be perpetual without coupon step-ups, the retail market’s recent appeal for issuers includes strong demand and greater certainty when it comes to execution.
Furthermore, the pricing is tempting. "The pricing of a fixed retail tier one issue versus what is available in the institutional non-step-up market is not even comparable," said a financial institutions (FIG) syndicate banker in London. "It is at least 100bp. If on top of that you add the fact that the issuer owns the call, that’s worth another 60bp. Therefore, the retail format is a very efficient way of raising capital."
SMFG welcomed
Sumitomo Mitsui Financial Group took this view and launched what
bankers claimed was the first retail-targeted hybrid tier one deal for a Japanese bank outside the domestic market. It had also been a while since a Japanese bank had come to the tier one market in Europe at all.
The last Japanese tier one transaction in Europe came from Mitsubishi UFJ Bank in January 2007, when it sold an institutional perpetual non-call 10 year transaction of €500 million and £550 million.
The welcome for Sumitomo could not have been better and the oversubscribed order book meant it was able to bring the transaction at the tight end of the 8.75%-9% guidance.
The size impressed the market, although few were surprised to see the Japanese bank succeed with such a strong name.
Even before the books opened, the transaction had received favorable feedback during the roadshow around Asia, Switzerland and the U.K. which followed the announcement on April 28.
The roadshow was fruitful and the final book was dominated by Asian names, which took 42% of the issue.
However, while retail investors drove the deal, there was also some institutional demand which helped boost the final size. One syndicate banker said: "For
a Reg S deal, $1.8bn is certainly large. Looking at the size, however, there would have been an institutional flavor to the issue as well."
Thirty percent of the bonds went to institutions.
Market participants were encouraged by the pricing at the tight end of guidance, as well as the size. "We are seeing a break-out in pricing of retail deals and this transaction shows that deals can come tighter," said a FIG syndicate banker.
"Natixis struggled to get over the line a few weeks ago and Man Group had to put a chunky coupon on its deal to get it done as well as a generous 1.5% concession to private banks. This deal coming at 8.75% is a welcome reversal of issues having to come wider."
More issuance to the same investors is expected as early as next week.
A U.K. bank is said to have been on the road with Credit Suisse and UBS this week, visiting accounts in Asia and Switzerland. A mandate announcement is expected as early as today.
While the retail format is expected to remain in favor, market participants hint that institutional
deals could also return next week. With spreads having tightened substantially, new issues could be on the cards.
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