We have been asked to provide an update on legacy instruments and current momentum. NatWest Group (previously RBS) has announced a tender on several legacy Tier 1 and Tier 2 bonds (total USD 4.4 billion). While this is in-line with our view of a gradual take-out of these legacy bonds, the timing sends a positive signal.
Despite heightened uncertainty due to Brexit and Covid-19, regulators allowed the bank to optimise its capital stack by taking-out several increasingly inefficient capital securities, due to lose all capital value by December 2021. The group’s strong capital position – 17.2% common equity tier one (CET1) ratio and GBP 15 billion worth of excess capital – and excess of subordinated debt compared to requirements helped obtain approval.
Nevertheless, we continue to see the catalyst for these old-style bonds to be taken-out until the end of the grandfathering period as intact, irrespective of macroeconomic developments.
In detail, the main focus is the tender of two legacy Tier 1 bonds with around 4 percentage points of upside compared previous trading levels. For example, the USD-denominated 7.648% perpetual legacy Tier 1s (callable in 2031) are tendered around 154% (fixed spread of 140 bps over the treasury yield) compared to previous levels of around 150%, see Chart 1.
We see this as generous and, in our view, it reflects NatWest’s track record as a debtholder friendly issuer.
Both legacy Tier 1s have make-whole clauses, where upon full loss of capital eligibility (ie in December 2021) these can be repaid at favourable levels. In this case, NatWest is paying investors close to the favourable make-whole levels, sending a strong signal. As the future makewhole price is based on market conditions at the time (make-whole price is calculated based on a fixed spread over US treasury rates), there is no certainty that the future make-whole price will be as attractive, and therefore this provides a strong exit opportunity for bondholders.