BBVA debt sale shrugs off Banco Popular concerns

The growing maturity of the market for the riskiest European bank debt was underlined on Wednesday when BBVA sold bonds at the lowest ever rate for a Spanish lender, even though similar debt securities from Banco Popular traded at deeply distressed levels.

Demand for debt sales from Spanish lenders has been red hot in 2017, with Spanish banks having already sold more bonds so far this year than for the whole of 2016.

BBVA raised €500m of new additional tier-one bonds at a yield of just 5.875 per cent. The bonds were sold to about 10 large asset managers, according to market sources, in a private debt sale arranged by Goldman Sachs.

Additional tier-one bonds are designed to expose debt investors to losses at times of distress, effectively shoring up the bank’s balance sheet.

The value of such bonds from Banco Popular has see-sawed in the secondary market this week, on the back of speculation about whether a fellow Spanish bank will acquire the lossmaking lender.

Banco Popular has to raise billions of euros in extra capital. And subordinated debt holders could face severe losses if a white knight does not step in. Its additional tier-one bonds are trading at double-digit yields as a result, with some quoted as low as 75 cents on the euro.

One banker specialising in financial bonds said that the fact that BBVA was still able to execute on its debt sale, despite the concerns around its smaller peer, showed the growing sophistication of the market for riskier bank debt.

“If you go back to the first quarter of last year, concerns around Deutsche Bank’s ability to pay coupons meant the whole AT1 market fell apart,” he said.

“I think it shows there’s a great maturity in the market now that investors are able to look at Banco Popular as an isolated or idiosyncratic incident and assess the health of other Spanish banks on their own merits.”

The way BBVA conducted its debt sale suggests that the Spanish lender was not willing to take any chances, however.

Several bankers said that Goldman Sachs had offered BBVA hard underwriting, guaranteeing that the issuer would not have to pay more than an agreed rate of annual interest, but leaving the underwriter on the hook if they could not sell the deal at that price.

BBVA said that all of the bonds were placed to “real investors”, meaning that no underwriting commitment was executed. But it declined to comment on whether an underwriting commitment had been offered as a backstop in case the bond was not fully sold.

BBVA is not the first peripheral European lender to turn to the private market to nullify market risk on an additional tier-one sale.

In December, UniCredit sold €500m of these bonds to a handful of investors at a chunky 9.25 per cent yield.

At the time, the Italian lender was still to complete its €13bn rights issue and concerns were at their height around whether subordinated debt at Monte dei Paschi di Siena would be “bailed in”.