One of the challenges that banks face when considering the re-financing of AT1 capital is market timing. Treasurers have to answer the question whether to issue when market conditions are supportive, which may result in a considerable period when they have two overlapping securities (adding to their interest overhead); or wait to refinance just before the call date, which of course increases the risk of having to issue in a market demanding more punitive terms.
This creates a real quandary for issuers, especially for those less frequent issuers and particularly in a late cycle period when uncertainty is heightened.
We believe that the announcement by Coventry Building Society yesterday afternoon is a novel solution to this quandary, which we expect will be strongly welcomed by many borrowers who would be looking at the potential refinancing of their AT1 capital and are considering the punitive costs of overlapping new securities with those being re-financed.
Coventry Building Society has one AT1 bond outstanding (£400m 6.375%), which has its first call date due in November of this year. They have announced an ‘any or all’ tender for this bond at a price of 102.25 (approximately 1pt over the current secondary level) while announcing a new AT1 as a full or partial re-financing, obviously depending on the extent of the investor participation in the tender process.
Announcing a tender to coincide with a new issue, allows Coventry to issue the new deal into a relatively receptive market, while alleviating a considerable amount (possibly all) of two securities overlapping; thereby saving the Society considerable interest charges despite the tender being offered at a 2.25% premium to the call price.
This is a smart and novel approach that other borrowers are bound to consider, and another welcome development in this sector.