The Portuguese banking sector has struggled with bad loans and problem debts for years and state-owned Caixa Geral de Depositos has been far from immune.
Caixa Geral – the country’s largest bank – was the subject of a complex €5bn rescue package agreed with the EU in mid-2016, part of which involved the issuance of up to €1bn of subordinated debt to investors.
On March 23, the bank took a significant step towards that goal when it launched a €500m additional Tier 1 (AT1) transaction paying a quarterly coupon of 10.75%. Not only was this the first AT1 trade ever issued by a Portuguese entity, it was also the first time a Portuguese bank had accessed the market since 2015. As such, the stakes were high, particularly given that Caixa Geral needed a successful outcome.
“The issue of subordinated debt was part of the conditions agreed between the Portuguese state and the director-general for competition at the European Commission for the recapitalisation of Caixa,” says Bruno Costa, deputy manager of Caixa Geral’s financial markets department. “It was one of the conditions to avoid the capital increase being considered a state aid under EU rules.”
Why AT1
Caixa Geral began thinking about the transaction last August, as soon as an agreement in principle had been reached with the EU. It soon became clear an AT1 deal was the most appropriate way forward.
In order to pass the so-called ‘private investor test’, Caixa had to prove it was able to raise capital in the market, according to Mr Costa. “But because our equity cannot be held by private investors, only the Portuguese state or entities related to it, AT1 was chosen because it is the most subordinated form of debt next to equity,” he says.
Caixa Geral had been working with several banks on possible routes to market. Following a bidding process, the group chose five lead managers: Barclays, CaixaBI, Citigroup, Deutsche Bank and JPMorgan.
“We sent out a request for proposal to a restricted group of banks that had been in talks with Caixa for several months. We decided to choose a smaller group, based on the quality of the proposals presented, but also taking into account their overall relationship with Caixa,” says Mr Costa.
Show on the road
On March 21 and 22, just before the deal was formally launched, Caixa Geral went on a two-pronged roadshow with one team meeting investors in London and Paris, while a second met investors in Lisbon.
The meetings came less than a fortnight after the release of Caixa Geral’s 2016 results. Although these were relatively strong at an operating level, benefiting from cost reductions and growth in net income, the bank made a net loss of €1.86bn after a substantial €3bn impairment and provisions charge.
“Investors asked many questions about the financial situation of the company, including liquidity, solvency and asset quality, as the 2016 unaudited accounts were only published on March 10,” says Mr Costa.
“They also asked several questions regarding the targets of the strategic plan agreed with the director-general for competition for the period 2017 to 2020, which was also announced publicly on March 10. Essentially they were interested in aspects related to the evolution of net interest income, operational costs and profitability.”
The buy-side may have asked probing questions, but most left the roadshow feeling reassured. “In general, investors recognised that Caixa has a very strong liquidity situation and that once the recapitalisation was completed, it would also have a robust capital structure, which is targeted to improve with the implementation of the strategic plan over the next four years,” says Mr Costa.
Litmus test for demand
Nonetheless, this was the first issuance from a Portuguese bank for about two years and a litmus test for demand for paper from peripheral, non-investment grade financial issuers.
“There was some concern associated with that, but Caixa is used to having a regular presence in the market for different types of instruments,” says Mr Costa. “Given Caixa’s importance in the Portuguese financial system, we were led to believe there would be healthy demand for our issue, even at such a subordinated level.”
At 9am on March 23, a €500m no-grow deal was announced, with initial price talk of a coupon ranging from 11% to 11.5%. In less than two hours, the book had grown to more than €1.5bn and at midday, the transaction was officially launched at 10.75%. Orders continued to come in and the book grew to more than €2bn, before the deal was closed.
For Caixa Geral, the oversubscription was proof that investors had bought into its recovery story, particularly as more than 60% of investors visited during the roadshow subscribed to the AT1 transaction.
Looking ahead, the bank needs to issue another €430m of subordinated debt by September 2018, but in the meantime it is likely to focus on Tier 2 issuance. “Caixa’s liquidity situation is very comfortable, so any future issuance will be driven by regulatory requirements,” says Mr Costa. “Depending on market conditions, we could access the market for Tier 2 at the end of this year or beginning of the next year.”
