In an extraordinarily short time frame, while much of the market was on holiday, UBS’s hybrid team managed to administer issues from Nationwide, DnB NOR, Generali and HSH Nordbank. Edward Russell-Walling reports.

The beginning of the year is usually quiet for financial institutions group (FIG) hybrid transactions in the international debt markets, not least because many of the institutions are in their closed periods. Which makes the recent scorecard of the UBS hybrid team all the more extraordinary – it was involved with four western European hybrid issues in just three weeks.

“Each was a bit different from the norm,” says team leader Frank Kennedy, UBS’s head of European financial institutions, debt capital markets. And indeed they were, ranging from sheer size to the tightest spreads ever achieved for a sterling issue.

First out of the box in January was a ground-breaking Tier 1 transaction for Nationwide, the UK building society, in which UBS was the sole structurer. With its eye on the implementation of Basel II, Nationwide was looking for flexibility in its capital structure. Much of its risk-weighted assets are, unsurprisingly, in UK residential mortgages, and that risk weighting is expected to fall.

Regulatory hurdles

The team felt that the appropriate structure would be a perpetual non-call six, step-up 11 issue. This would give the building society the flexibility of a call before year 10, while allowing the issue to price significantly inside a traditional non-call 10. However, the way in which the Financial Services Authority (FSA) had framed its rules on hybrid capital was proving to be an obstacle.

“The FSA rules, technically, said no calls before 10 years in a step-up deal,” explains Vinod Vasan, managing director and UBS head of capital products. “Basel I, however, says you can have a call before 10 years, as long as the step-up is only at 10 years.” UBS spoke to the FSA, suggesting that its rules were not in the spirit of the banking accord, and requesting modification to reflect the requirements of Basel I and the Capital Directive. The FSA accepted the point and changed its rules with effect from January 1.

“It is a very unusual structure,” says UBS managing director Gary Abrahams, who heads FIG debt capital markets (DCM) for the UK and Ireland and who worked on the Nationwide deal. “But it’s what the issuer wanted – and it’s what investors wanted. Given the shape of the sterling yield curve, which is quite inverted, they liked the added benefit of a shorter call period. We were issuing where the curve was highest.”

The upshot was that the issue achieved the tightest-ever spreads for sterling Tier 1 paper, at gilts plus 98 basis points (bp). Moody’s gave it basket C treatment (50% equity credit), the first for a building society. The initial £300m (€440m) on offer attracted an order book of £1.8bn, and was increased to £350m. “It was small but perfectly formed,” Mr Abrahams says, “and set the tone for the later transactions.”

Speedy manoeuvring

The next transaction was another £350m Tier 1 issue, again driven by UBS, for Norway’s DnB NOR. This was the first Tier 1 deal from DnB NOR since it was formed from the merger of Den norske Bank and Gjensidige NOR in 2003. Although the deal was a standard perpetual non-call 10, the team worked fast to take advantage of the strong market conditions highlighted by the Nationwide transaction.

“[DnB NOR] wanted perfect pricing and smooth execution,” says Christopher Bond, DCM executive director responsible for Nordic and Benelux FIG at UBS. That was pretty much what it got. With initial price guidance at gilts plus 107bp, the order books were open for one hour and 15 minutes. In that time, bookrunners UBS, Barcap and JPMorgan received orders of £1.9bn, with a substantial chunk from those who had missed out on Nationwide. The deal was priced at gilts plus 105bp.

Then came “the big one”: a dual tranche euro/sterling offer that raised the equivalent of e2bn for Italian insurer Assicurazioni Generali. Just about anybody who was anybody in Europe wanted a piece of it. Recent history, however, had given the deal an added spice.

In 2006, Generali had been busy reorganising its balance sheet, which included buying out the minorities in its German and Austrian businesses, as well as buying back some of its shares. In June, as part of the exercise, it raised €2.775bn in its debut Tier 1 issue, complete with roadshow. Only a few weeks later, it announced that it was paying €3.9bn to acquire Toro Assicurazioni. Investors were “surprised”, to say the least, because it had not been mentioned in the roadshow, and some were sufficiently annoyed to sell the paper.

In truth, the opportunity had only arisen after completion of the hybrid issue, but there was some residual grumpiness when the January 2007 hybrid – to finance the Toro acquisition – was revealed.

Another roadshow hit the trail to explain the rationale behind the Toro deal and the thinking behind this latest issue, which was designed to complete the acquisition financing. (The balance was made up of residual cash from the June 2006 hybrid and from asset disposals.) Two teams pitched to 84 investors in seven UK and European cities, and the Generali CEO was judiciously included in the line-up.

“Investors, who had had time to digest events, felt fairly positive on the rationale,” recalls Fabio Lisanti, DCM managing director responsible for southern European FIG at UBS. “The decision was made to go into both markets – to tap the long end of the sterling market and, in the euro market, to go for a classic non-call 10.”

Grumpiness was overcome, and most of Europe’s major investors piled in. First of the two tranches was a €1.25bn perpetual non-call 10, with initial price guidance of mid swaps plus 100bp plus mid-to-high teens. It attracted 239 orders, totalling €7.3bn. Two enthusiasts put in orders for €250m each. The issue was priced at mid swaps plus 114bp.

The sterling tranche – £495m perpetual non-call 15 – sparked even more of a clamour. With guidance at gilts plus 150bp area, it drew in 145 orders worth £4.2bn, and a largest single order of £200m. It was finally priced at gilts plus 146bp. Joint bookrunners with UBS were HSBC, JPMorgan and Mediobanca.

The fourth hybrid was a subordinated deal that also sought to take advantage of a hungry market. This was a e1.75bn dual tranche fixed-rate/floating 10 non-call five lower Tier 2 issue for HSH Nordbank. The landesbank had not visited the market since it lost the state guarantee in 2005.

Last year, to make the story even more interesting, the JC Flowers investment fund acquired a 26.6% stake in the bank. On both counts, a roadshow was deemed vital.

“The whole landesbank sector needs roadshowing,” says UBS executive director Nikolaus Hohenberg, who covers German and Austrian FIG. “Without its guarantees, the sector needs explanation. It was also important for HSH Nordbank to talk to investors about the change in its shareholders.”

On the road

The roadshow lasted six days and the order books were not opened until the bank had spoken to all interested investors. The issuer wanted a benchmark size and, based on feedback, it made sense to opt for the dual tranche.

Orders of €1.4bn for the fixed/FRN tranche and €1.9bn for the FRN/FRN were registered, and the respective sizes were fixed at €750m and €1bn. Prices were tightened slightly to mid swaps plus 34bp and three-month Euribor plus 33bp. Bookrunners were UBS, HSH and Deutsche Bank.

Part of the achievement was being able to pull off these successive deals so successfully in such a short space of time. But the team did have market conditions on its side. “Investors want to be in financials relative to corporates,” notes Oliver Sedgwick, European head of FIG syndicate at UBS. “There were also record redemptions in the sterling market during December, and not all that cash was in assets where investors wanted it to be.”

The three sterling deals in particular demanded some forbearance to avoid bumping into each other. “It was a delicate process,” admits Mr Abrahams. “But we got through it without screaming at each other. We have all worked together for a long time.”

Quick on the draw: Top row (l-r) Fabio Lisanti, Oliver Sedgwick, Christopher Bond, Nikolaus Hohenberg, Gary Abrahams. Seated (l-r) Vinod Vasan, Frank Kennedy

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