UBS deal a cathartic moment for AT1s

UBS came to the market yesterday with a two-tranche $ additional tier 1 transaction, which was highly anticipated and didn’t disappoint. The deals were marketed with initial price talk of 10% for a five-year call and 10.125% for a 10-year call. The initial pricing implied about 550bps pick-up in spread over treasuries for the five-year and 560bps for the 10-year tranche – and it is worth noting the bonds have ratings of Baa3/BB/BBB- from Moody’s, S&P and Fitch, respectively.

The transaction was launched in early London hours and by early afternoon initial price talk had already been revised down to 9.625% and 9.75% for the five and 10-year, respectively.  The books at that point stood at a very impressive $26bn, however, there was no indication of the final issue sizes at that point. After US markets opened, the book continued to swell, and reached over $36bn at the close. Final pricing was cut further, landing at 9.25% for both deals, which amounted to $3.5bn of new issuance. The final pricing still implies a healthy margin of about 470bps over five- and 10-year treasuries for what is an investment grade rated bond. 

Despite the significant tightening of coupons, the bonds are trading well in the secondary market, with the 10-year deal already being bid at close to a 102 cash price on Thursday morning.

The importance of this deal for the AT1 market, and how well the execution has gone, cannot be overstated in our view, while the Swiss authorities must also be breathing a sigh of relief given the cloud hanging over its regulatory regime. 

Firstly, the book size of $36bn is unheard of, not only in the AT1 space, but more broadly in general credit markets, and we struggled to think of a more successful deal. To put the order book size into some context, the amount represents around 17% of the value of the Coco bond index, or about a third of all $ AT1 bonds. The demand also dwarfs the size of the entire RT1 space (total outstanding is $18bn equivalent across $, € and £). We also note that the deal came on the heels of SocGen placing their 10% $1.25bn AT1 earlier this week with ~$6bn book size.

Secondly, the performance of both tranches the following morning has been nothing short of phenomenal, considering the tightening of final pricing versus initial price talk. This highlights the quality of the book and the strength of demand that supported the transaction.

Finally, the deal was highly-anticipated by the market as it was the first benchmark issue out of Switzerland following the Credit Suisse events earlier this year – we note Vontobel issued an investor-friendly $200m call and refinancing AT1 in September but that was mostly subscribed by a single investor. The keen anticipation of the UBS transaction was mixed, with uncertainty around the adequate pricing levels, investor interest, and the attitude towards an issuer out of the Swiss jurisdiction. After all, UBS’s balance sheet implies significant presence in the AT1 market and will represent a benchmark for pricing the rest of the space. 

The size of the book certainly draws to the value available from other high-quality banks in Europe. There is obviously a lot of cash on the sidelines for the correct deals. And with investment-grade rated issuers, such as BNP, SocGen, Barclays, HSBC and BBVA, having AT1s outstanding with yields close to, or above 10%, we would expect some of the disappointed money to find its way into the secondary markets. It’s also worth noting that there seems to be ample demand for new issues, which should support the circa $30bn of AT1 debt that is callable in 2024.  

In any event, we believe that the execution of this transaction has addressed a lot of these uncertainties and, in a way, represents a cathartic event for AT1s. Coupled with the strong performance of treasuries in the past few weeks, as well as evolving rhetoric from central banks around peak rates, we see the sector very well set up for the reminder of the year and next.