To finance its acquisition of Banca Nazionale del Lavoro, BNP Paribas raised two tranches of Tier 1 capital, switching one from the dollar market to sterling in a wise move. By Edward Russell-Walling.
For those who doubted that European cross-border bank consolidation could happen any time soon, BNP Paribas is the latest to test their non-belief.
The success with which it has financed its acquisition of BNL, with a mix of equity and debt, suggests that investors are on the side of the believers. However, one tranche of Tier 1 debt was switched from US dollars to sterling at the last minute.
Having received all the necessary regulatory green lights, BNPP is in the process of acquiring Banca Nazionale del Lavoro (BNL). Although it is only the sixth largest bank in Italy, BNL will elevate its French acquirer to that exclusive club of European banks with retail networks in two countries. BNL is worth €9bn, however, and acquisitions must be paid for.
BNPP decided to raise about €7bn of acquisition finance to fund the deal. Early indications were that this would be split into €5bn of equity and €2bn in Tier 1 debt. When it launched its rights issue in March, however, the equity element, aimed solely at French investors, had been tweaked up a little to €5.5bn.
“The rights issue made up the bulk of financing for the acquisition,” says Martine Billeaud, BNPP’s group head of medium and long-term funding. “The markets were expecting up to €2bn in hybrid financing but, after adjusting for the rights issue and the capital ratio, we settled for the equivalent of €1.4bn.” The capital ratio has been maintained at 7%.
The Tier 1 capital was raised in two tranches. The first was a perpetual €750m non-call 10 issue, with a coupon of 4.73% and a 100 basis points (bp) step-up (advisable in euros). Sole-managed by BNPP itself, the book was open for a mere 30 minutes and drew orders worth €1.6bn, in spite of the fact that there was effectively no new issue premium and market conditions were less than ideal.
A good price
“We are rather confident in euros, where people like our name and in which we have not been to the institutional market for three years,” says Ms Billeaud. “We got a very good price and the secondary market levels are there.”
The original plan had been to print a second tranche in US dollars. But shortly before the deal was launched, the National Association of Insurance Commissioners (NAIC) dropped a bomb on the US hybrid market by reclassifying a Lehman Brothers hybrid issue. It ruled that US insurers, who represent a fifth of hybrid investors, should count the bond as equity rather than debt – meaning a 100-fold increase in risk weighting.
“We had planned to go to the dollar market because we have a forex imbalance in terms of weighted assets and are underweight in dollar capital,” says Ms Billeaud. “But, with the NAIC problem, we felt it would no longer be wise.”
Second tranche
A better idea came along in the form of a reverse enquiry for sterling, which gave BNPP the confidence to target the second tranche, with no step-up, at the UK market. “The alternative would have been to go to the retail market in Asia and Europe, where we have a very good franchise,” Ms Billeaud explains. “We did that last October with two very successful retail Tier 1 issues, one for $400m and another for €1bn.
“We would have done it again if we had not felt confident in sterling. But the UK market is ideal because investors there are used to dealing with perpetual bonds, without a step-up.”
The sterling tranche raised £450m (€649.9m – on orders of £600m) with a coupon of 5.945% – good for the issuer, people said, and unlikely for a lesser name. Taking the two tranches together, the bank reckoned there was more for the taking. “The market was there and we could have done more, but it was not necessary,” says Ms Billeaud.
Senior debt issue
On a broader front, BNPP issued about €26bn in senior debt last year, mainly via its long-running European medium-term note (EMTN) programme. The total is likely to rise to €35bn in 2006, Ms Billeaud forecasts. For the past three years, the bank has had an MTN programme in the US, where it would like to do more. Other diversifications took it to Switzerland last year, and it is eyeing Canada, where it has a subsidiary and where the law has changed to allow foreign companies to access the markets.
“We are also continuing to diversify in terms of instruments and investors,” Ms Billeaud concludes, adding that private banking is likely to be an increasingly important source of funding.
