Thu 04/27/2023 04:47 AM
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UPDATE 1: 4:48 a.m. ET 4/27/2023: Italian bank UniCredit said having received the ECB authorization, it will exercise its option to early redeem in whole its €1.25 billion 6.625% additional tier one notes at par, together with accrued and unpaid interest, on June 3.

The bank said that its strong capital position and generation abilities mean that it no longer requires the funding, adding that it will have no need to issue an AT1 instrument for the foreseeable future.

Original Story 9:25 a.m. UTC on April 4, 2023

Investors Buy Into UniCredit €1.25B 6.625% AT1 Notes as Bank May Call Notes on June 3 Pending ECB Approval

Relevant Documents:
6.625% Perpetual Notes Prospectus
Q4 Fixed Income Presentation

Some investors are buying into UniCredit’s €1.25 billion 6.625% additional tier one bond after the bank reportedly announced its intention to call the notes on June 3, sources told Reorg.

The perpetual notes slid to the low 90s in the first weeks of March as Silicon Valley Bank collapsed in the U.S. and Credit Suisse’s decline unfolded. The 6.625% notes have since rebounded and are now indicated at 98-99, sources said.

Reuters reported that UniCredit has sent a request to the European Central Bank, or ECB, to repay the €1.25 billion perpetual bond, in a move that shows it has ample capital and aims to keep funding costs under control.

The ECB is yet to respond but sources argued that ECB authorizing the execution of Unicredit’s 2022 share buyback program for up to €3.343 billion bodes well for the AT1 transaction as it signals that the regulator believes UniCredit’s liquidity is robust.

On the other hand, sources pointed out that the ECB has previously authorized AT1 notes’ calls only if these were coupled with an issuance of new instruments designed to bolster the bank’s capital.

According to the bond prospectus, if the notes are not called on June 3, its coupon will reset to 6.387% per annum above the five-year mid-swap rate.

Introduced after the 2008 global financial crisis, AT1s are contingent convertible securities, or CoCos, that can be converted into equity or wiped out if a bank’s capital ratio falls below a predefined threshold. They are usually held by hedge funds but also popular among retail and wealth management investors in Asia.

The whole asset class, representing a market of around $275 billion, tumbled about 20% ​​after the Swiss regulator’s decision to fully write down 16 billion Swiss francs ($17.24 billion) of Credit Suisse’s AT1s as part of its merger with UBS. Investors have started to price in the risk of banks not redeeming these junior bonds when they have an option to do so given the cost of replacing them with new AT1 issuances.

After the interventions of the ECB and the Bank of England designed to reassure markets, the asset class rebounded but is still indicated around 13% lower than a month ago, sources pointed out.

According to UniCredit’s AT1 bond prospectus, the 6.625% perpetual notes can be written down or converted into equity if the bank’s CET1 ratio falls below 5.125%. UniCredit’s core capital ratio was 16% at the end of 2022. Taking into account the large planned capital distribution of dividends and share buybacks, the CET1 ratio would stand at 14.9%, versus UniCredit's own target of 12.5%-13% and a regulatory threshold of 9.2%.

In a fourth-quarter fixed income presentation, the bank said it might issue up to €1 billion of AT1s in 2023 depending on balance sheet evolution and market conditions.

--Luca Rossi
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