The UK lender’s debut AT1 issuance
closed today, breaking new ground in the hybrid debt market.
Here’s how it was structured
Nationwide today became the first building society to
sterling Additional Tier 1 (AT1) bond. The deal is expected
to set a template for how non- joint stock banks can enter the
Additional Tier 1 (AT1) is a form of loss-absorbing capital
that can be written down or converted into equity if a firm
runs into trouble.
As a mutual, Nationwide has no
equity into which the bonds can convert. Because of this, the
development of a new instrument known as core capital deferred
shares (CCDS) was crucial to the UK lender’s
entrance into the market.
"A core capital deferred share [CCDS] is an equity
instrument that behaves like a corporate share and so counts as
common equity Tier 1 under the new European capital rules in
force in the UK," said Jonathan Mellor, a partner with Allen
& Overy in London. "A lot of work went into developing that
instrument, with Nationwide ultimately
issuing the shares in December last year."
The bonds will automatically convert into CCDS if
Nationwide’s ratio of common equity Tier 1 to risk
weighted assets drops below seven percent.
According to Mellor, the unique issue was working out the
conversion mechanics and what events might lead to an
adjustment to the conversion price. These issues had not been
thought about before in the context of a building society.
Key deal terms at a glance
A new market for bank capital
The deal is also significant because it marks the first
sterling-denominated AT1 bond. With Nationwide
reportedly deluged with over £9 billion worth of
demand, the deal’s success has opened up the
possibility of other European financials diversifying into new
"While it appears to have come out quite tight, the bond has
performed well and now trades at about 6.5%," one source at a
major European bank told IFLR.
"The performance of the instrument may suggest that there is
a natural market for sterling AT1s although we also have to
look at the strong current market," they added. "The hunt for
yield continues, which partly explains the performance."
"The performance of the
instrument may suggest that there is a natural market
for sterling AT1s"
The investor base for contingent convertible bonds (CoCos)
has grown dramatically since its modest beginnings, when hedge
funds and wealthy private banking customers dominated the
"Now more European real money accounts are involved which
makes the UK market very appealing for a potential issuer,"
said the market-insider. "Santander for example, given its
strong UK presence, is certainly a likely candidate at one
The offering circular is available
The deal closed on March 11. Citigroup Deutsche Bank,
RBS and UBS were the joint book-runners. Allen & Overy
advised Nationwide. Linklaters advised the joint
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