(Bloomberg) -- European banks have turned to the US dollar market to sell almost $8 billion of bonds that help them boost capital levels. Investors hunting for higher coupons want even more.
Sales of the debt known as AT1s, designed to absorb losses when a bank runs into trouble, are running at a record pace and include deals by Barclays Plc, Spain’s BBVA, and UBS Group AG. Demand has been more than eight times supply on occasion, highlighting money managers’ thirst for yield as spreads for most forms of debt continue to grind tighter.
Selling the bonds in the US makes sense for both banks and investors because of the different metrics they use to measure value. Banks are deciding where to sell based in part on risk premiums — the extra amount of yield they’ll pay compared with safer government bonds. Tapping the US market gives Europe’s traditional lenders access to tighter spreads compared with euros.
Money managers are focusing on the yields the bonds pay, which are relatively high, often ranging from 7% to nearly 10%.
“For investors, the bigger coupons are always going to be attractive to lock in.” For issuers, we “are starting to see really skinny spreads,” said Julien Roman, a managing director at Bank of America Corp. “The tight spreads of low beta European bank dollar AT1s are still offering a hefty premium” to the preferred equity of their US peers, he added.
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The interest in the hybrids comes as US banks are expected to face softer regulation following the election of President Donald Trump, meaning they may have to issue less preferred equity. That’s been a boon for European banks, which unlike their US peers need to meet much more stringent regulatory requirements, as they can take advantage of the gap left by US lenders.
The region’s banks have also proven resilient to falling interest rates and their shares have rallied in response to promised share buybacks, making them by far the best performer in European stock indexes this year.
Barclays became the latest European bank to tap the market this past week, selling a $1.5 billion AT1 and there remains as much as $23 billion of outstanding risky debt by European lenders that is first callable this year.
“Expect to see more issuance in the coming weeks amid the resilient backdrop with borrowers accelerating plans,” Roman at Bank of America said.
While the risk of a complete wipe out similar to what happened with Credit Suisse two years ago has receded, the tightness of the spreads at which the deals have priced has some investors worried about so-called extension risk. When it is time for the new bonds to be called, the spreads they reset to are so low that issuers might decide against replacing them.
“We are creating a cohort of AT1s with awful resets. The high coupons mask a larger extension risk down the line,” said Aegon Asset Management portfolio manager Alexander Pelteshki.
Still, European banks have a track record of calling and replacing deals at the first opportunity, a draw for investors. Only this week, both ING and Aareal said they were calling their AT1 debt due to be called in April.
Week In Review
X Holdings Corp. is in talks with investors for a fresh equity fundraising that would value the company at $44 billion, similar to its valuation in 2022 when Elon Musk purchased the platform.
Some money managers are becoming cautious about corporate bonds due to tight investment-grade spreads and are reducing allocation to the asset class in favor of government bonds and cash.
Johnson & Johnson sold $5 billion of high-grade corporate bonds Tuesday to help fund its acquisition of Intra-Cellular Therapies Inc., part of the market’s second-busiest day this year.
Carlsberg Breweries A/S and Johnson & Johnson sold the first major buyout debt of the year in Europe’s primary market on Wednesday, pushing upwards corporate bond sales volumes after a slow start for the sector.
Deutsche Bank AG is sounding out investors for $775 million in debt financing to support Blackstone Inc.’s acquisition of professional services firm Citrin Cooperman Advisors.
Plant-based burger maker Beyond Meat Inc. is reaching out to investors to borrow as much as $250 million from private credit lenders, its second such attempt in less than 12 months.
Cash-strapped Thames Water bought itself some more time to reorganize its debts after a London judge approved an emergency loan worth as much as £3 billion ($3.8 billion). Separately, KKR & Co. has offered to inject nearly £4 billion ($5 billion) for a majority stake in the beleaguered utility.
Citigroup Inc. and UBS Group AG are organizing about €2 billion ($2.1 billion) of funding to back Bain Capital’s acquisition of German facility-management company Apleona Group GmbH — a rare deal amid a dearth of acquisitions in recent years.
Lenders are pushing back against private equity firms’ attempts to remove investor protections from debt deals, including the J Crew, Serta, and Chewy clauses.
Ticket sales to sporting events could become collateral for the next type of debt securitization, according to Academy Securities Inc., especially as more investment firms snap up shares of professional sports teams.
Nikola Corp. filed for bankruptcy, culminating a long decline for the onetime darling of the electric-vehicle industry, which grappled with weak sales and cycled through CEOs in the wake of a fraud scandal.
The US-based operator of Forever 21 Inc. is preparing to close at least 200 more locations from the fast-fashion retailer’s shrinking store base as part of a bankruptcy process that’s expected to kick off as soon as next month.
Spirit Airlines Inc. won court approval to leave bankruptcy via a lender-backed take-private deal after rejecting a takeover offer from rival Frontier Group Holdings Inc.
On the Move
Moody’s Ratings named Marc Pinto its global head of private credit, following the departure of Ana Arsov last month. Arsov left Moody’s to serve as the chief investment officer at her own family office.
Houlihan Lokey Inc. hired Carle Felton as a managing director as it seeks to build out its capital-markets business. He joins from Cascadia Capital.
ING Groep NV is hiring Jens Lindner from German lender Helaba, to join a team that provides securitization solutions.
