Value has returned to AAA CLOs
The past couple of weeks have seen a flurry of new issuance as rates and credit markets have stabilised, and the European summer lull is approaching fast. As usual, banks have been at the forefront of the issuance as they continue to prove that they have access to capital markets in all conditions. This week we have observed primary issuance of the most subordinated bank debt, Additional Tier 1 (AT1), for the first time in over two months and thought it would be interesting to share a couple of thoughts from the desk.
Skandinaviska Enskilda (SEB) is an exceptionally conservative Swedish lender with an impaired loan rate of just 42bp and a strong capital buffer of 490bp. The bank came to the market with a $500 million, non-call five year AT1 yesterday, pricing at 6.875%; a compelling level considering the instrument is rated BBB+ by Fitch. As a result, we are not surprised the deal attracted an order book of around $5 billion. Today, the similarly conservative Swiss lender Julius Baer issued an AT1 priced at 6.875%, rated investment grade rated and attracting an order book roughly 10x the $400m issue size.
The first thing to point out from this activity is that the Skandinaviska Enskilda refinanced an existing AT1 possessing a reset spread of +349bp, with this new AT1 having a spread of +407bp and representing a 58bp opportunity cost to SEB. Banks continue to conduct bondholder-friendly behaviour even during a period of severe market stress. We expect this to continue as they still hold record levels of capital buffers and remain eager to avoid any reputational damage and the associated effects.
The broader takeaway for participants is that quality will lead the recovery, with two investment grade issues reopening the AT1 primary market and subsequently trading up in the secondary market. The book sizes have shown plenty of cash exists on the sidelines for the right issuers, and, as we wrote recently, the extremely attractive spread levels available for such strong names may prove a catalyst for investors to explore the credit opportunities currently available. Once again, we take comfort that most banks appear considerate of their investor bases by taking the option to refinance rather than extending an existing deal despite a more punitive credit spread.
And so, as we in the UK prepare for a long weekend to celebrate the enduring presence of Her Majesty the Queen, perhaps high-quality names can spark a mini-revolutionary rally in the world of credit.