The renewal of the Greek crisis at the end of the second quarter of 2015 had many in the debt capital markets ducking for cover, but UBS stayed active and pushed through a number of large, innovative deals. 

In the volatile couple of months before the Greek debt crisis moved to its latest phase, some debt capital markets (DCM) teams stepped back to await calmer conditions in which their clients could issue. This was especially true for financial institution groups (FIG). The Europe, Middle East and Africa (EMEA) FIG DCM team at UBS, however, rolled up its sleeves and did more European business than anyone else, most notably in capital securities. 

FIG, together with covered bonds, is one of the few debt origination segments where UBS can still shine since it exited large parts of its fixed-income business in 2012. The Swiss bank was number one in European FIG DCM for the first half of 2015, according to Dealogic. "June was the most volatile month for credit," says James Marriott, UBS head of northern European FIG DCM. "There were good windows, but they needed to be chosen carefully." 

One of the drivers for the UBS team was regulatory capital activity. "There has been a regulatory race to the top in terms of required capital, focused on common equity Tier 1 and equity buffers," says Nigel Howells, UBS head of capital securities. "Against this backdrop, issuers want to make efficient use of all the capacity they have in non-dilutive format – additional Tier 1 [AT1] and Tier 2." 

The competing demands of regulatory measures have never been higher, according to Mr Howells, referring to the international total loss-absorbing capital (TLAC) standard versus the EU's Minimum Requirement for Own Funds and Eligible Liabilities (MREL), as well as varying approaches to implementation in different jurisdictions.

A two-way road 

Issuers need to plot a path that satisfies both regulators and investors. "There is a tension here," says Mr Howells. "Investors want products where they know the rules of engagement. Regulators have moved from a single measure to a dashboard approach. Negotiating and matching these different requirements is the essence of what we do." 

Equity and bond markets were jumpy during the second quarter of 2015, as they tried to second-guess when US interest rates would finally start to move up again, and as a Greek exit from the eurozone loomed and receded and loomed again. 

In the first week of June, UBS was structuring advisor and joint bookrunner (with Bank of America Merrill Lynch, Barclays, Morgan Stanley and Santander Global Banking and Markets) on Santander UK's inaugural public AT1 issue. Last year, Santander UK privately issued £800m ($1.25bn) of AT1 to its parent, Banco Santander, also with UBS as structuring advisor. 

The public deal was preceded by a three-day roadshow across Europe and the UK. "Santander UK is a very straight-forward, domestically focused institution," says Barry Donlon, UBS global head of capital and liquidity solutions. "It is a simple credit story and a rare borrower in AT1. The rarity of the offering was attractive at a time when the market was very volatile." 

The UK's Prudential Regulation Authority (PRA) is seen as a frontrunner when it comes to regulatory clarity, which was a plus. The issue also had the virtue of being denominated in sterling, when the euro was overshadowed by the Greek drama. "If you were going to buy anything in June, this was it," says Mr Donlon.

A UK first 

The structure of the deal was unusual for the UK, with permanent write-down loss absorption and a 7% trigger. The PRA always insists on a high trigger and prefers AT1 to convert into equity. Since Santander UK has no public shares available for conversion, however, this was the UK's first public AT1 issue with a permanent write-down feature. (The private placement has the same structure, for the same reason.) 

A sterling benchmark perpetual non-call seven-year transaction was announced on June 3, with initial price thoughts of 7.5% to 7.75%. By mid-morning the books had grown to £2.75bn and price guidance was tightened to 7.375% to 7.5%. The books closed soon thereafter with orders of more than £5bn, allowing the price to be set at 7.375% for a £750m deal size, Santander UK's maximum target. 

"The new issue premium and concession for the more aggressive structure was 8 basis points," says Mr Marriott. "That's lower than any new issue premium for senior unsecured." The bond subsequently traded higher. 

It was on the following day that Greece delayed a payment to the International Monetary Fund (IMF). Volatility returned to the market. Then another plan was announced and trading recovered. "We managed the flow of deals to the market appropriately," says Mr Donlon. 

A week after the Santander UK transaction, UBS was joint structuring advisor, alongside Deutsche Bank, on Bank of Ireland's inaugural AT1 issue. Speed was of the essence with this particular deal. It was roadshowed with two teams in Europe on the Tuesday and Wednesday, and the deal was launched on the Thursday. "Being intraweek was part of the success of the trade," says Mr Donlon. 

UBS is Bank of Ireland's corporate broker, and has advised on all of its major capital transactions since the start of the financial crisis, including two rights issues, a liability management exercise, and issues of preference shares and Tier 2 securities. The AT1 deal was structured with a 5.125% trigger and a temporary write-down loss-absorption feature. 

It went out with initial price thoughts of 7.625% for a €750m perpetual non-call five-year transaction. The response was eager, to say the least, with books in excess of €5bn, allowing pricing to be set at 7.375%. The final orderbook had about 350 orders totalling €5.6bn, the largest seen in a euro AT1 deal so far in 2015, and the highest level of oversubscription in a benchmark euro AT1. "This was a very rare credit," says Mr Donlon. "If you didn't buy it now, the next opportunity would be in three or four years' time, as it approached the call date."

Beware the Greeks 

It was as well that the deal was executed with despatch. On the very same day, shortly after the books were closed, the IMF abandoned negotiations with Greece. The crisis was not over yet, but the team kept taking advantage of windows as they appeared. On June 8 it had led a "heavily oversubscribed" €1bn five-year floating rate note issue for Intesa Sanpaolo. 

On June 24, as news on the Greek negotiations became more positive, UBS led a €1.5bn 10-year non-call five-year Tier 2 deal for ABN Amro. The next day, with HSBC, it led a £250m 10-year non-call five-year Tier 2 issue for the UK's Co-operative Bank, its first unsecured deal since it nearly collapsed in 2013. Simultaneously, the team managed a chunky €1.5bn five-year senior unsecured trade for UBS itself. 

On June 25, just before negotiations turned sour again, the bank worked on a A$700m ($517.47m) Tier 2 deal for Rabobank. "This was the first ever Kangaroo Basel III-compliant Tier 2 issue," says Mr Marriott. 

In Greece, matters would get worse before they got better, and it only agreed a deal with its creditors on July 13. Since then the UBS FIG team has executed a number of covered bond deals for Lloyds, Westpac, Commerzbank and Allied Irish Bank. 

The team expects the second half of the year to be busy in regulatory capital, with further developments in the TLAC and MREL regimes. "The rules continue to evolve," says Mr Howells. "We will move to the next set of considerations for capital management, such as legal structures and where to issue from." 

The market will be moving from theory to practice, according to Mr Howells. "If you are a global systemically important bank, the rules are clearer, because you have got TLAC," he says. "If you're a domestic institution, the rules may vary by jurisdiction. That's where you need the right advice, to do the right trade at the right time in the cycle."

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