Edward Russell-Walling reports on how SEB managed to sell €500m of hybrid capital securities in the midst of a market low-point.

It takes a lot to bring investors running in the international debt markets right now. Rarity and quality are a great help, as Skandinaviska Enskilda Banken (SEB) was pleased to discover when it sold €500m in innovative hybrid Tier 1 capital securities in less than two hours.

Swedish – indeed, Scandinavian – hybrid issues are few and far between because they are not permitted to make up more than 15% of Tier 1 capital. That certainly makes for a rarity. SEB is the closest thing to the Wallenberg family bank (the dynasty effectively controls one third of the shares). This pedigree, together with its recent record of regional excellence and profitability, gives the Aa2/A+ bank an air of distinction that some higher-rated institutions might envy.

Growing footprint

Active in retail, wholesale and merchant banking, wealth management and life insurance, SEB operates in the Baltics and Germany as well as the Nordic countries, and has been extending its reach into Poland and Ukraine, where it has acquired two smaller banks.

“We see a lot of business opportunities in our core markets, both through organic growth and bolt-on acquisitions,” says Anders Kvist, SEB head of group treasury. “We are keen to ensure that we have the financial flexibility, all the time, to benefit from any opportunities that arise. So, our funding strategy, liquidity management and capital raising activities are designed to give us that flexibility.”

SEB raised some hybrid capital in the US dollar market three years ago, but December’s issue was its first such outing of the century in Europe. A combination of healthy pre-tax earnings growth and a conservative dividend policy has enlarged the bank’s capital base through net retained earnings.

This, in turn, has created room for further hybrid issuance. “We started thinking about a hybrid in June 2007,” says Mr Kvist. “But we wanted it to have a more far-reaching loss absorption character than the traditional Swedish instrument, with stronger risk capital content. That’s the way we want our capital to look.”

The usual structure of Swedish hybrids means that an issuer’s ability to defer coupon payments is less flexible than the European average. Structural advisers, Goldman Sachs, came up with something that looked more like the traditional French Tier 1 instrument, giving SEB sole discretion on coupon payments, subject only to an ordinary dividend stopper.

In the case of potential write-down, interest is payable only on the currently outstanding and not the principal amount.

Yet, while the issuer benefits from an earlier trigger for write-down, the investors are ahead of common equity holders in the claim queue in the event of liquidation. Formal agency ratings of equity treatment were not sought, but Goldman Sachs would expect Basket C treatment from Moody’s, ‘intermediate strong’ from Standard & Poor’s and Basket E from Fitch.

The right timing

By October, all of the preparatory work was done and the necessary approvals were in place. The only problem was that it was a suicidal time for a bank, virtually any bank, to go to market. So SEB had to bide its time. Its opportunity finally came in mid-December, when Société Générale (SocGen) and UBS reopened the hybrid market, each with a €600m perpetual non-call, 10-year Tier 1 issue.

This was a selective window, not open to all comers. But SEB judged, correctly, that its name had enough class and clout to exploit it. “We did a short, preliminary roadshow and got the feeling that there was emerging interest in Tier 1 product from the right name, of the right quality,” says Mr Kvist.

SEB opened the books on its own perpetual NC10, complete with step-up clause, with Goldman Sachs and UBS as joint bookrunners.

The figures

The bank knew how much it could accommodate and, although it wanted to issue in benchmark size, it never intended to raise more than €500m. Yet after an hour-and-a-half it had €1.6bn in orders.

In such sensitive markets, there is a price to be paid, though, as SocGen and UBS had discovered. While they would have paid 70-75 basis points (bp) over mid-swaps in happier times, they were obliged to offer 235bp and 245bp respectively.

SEB took its lead from those figures and came in with guidance of 245bp over mid-swaps. Given the strength of demand, the final price was tightened to 240bp, with a coupon of 7.0922%, and the issue traded tighter still in the secondary market.

Early in January, SEB was back in the market with its inaugural euro jumbo covered bond. Like the hybrid, this was very well received by investors. With orders of €4bn, the three-year deal was finalised at €1.5bn, at 3bp over mid-swaps.

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