Chilean banks resurrect LatAm AT1sBancoEstado joined Bci as the second major bank to issue Additional Tier 1 notes in Chile in recent weeks, resurrecting issuance from the region as the country catches up with its Latin American peers in the implementation of Basel III standards. The state-owned bank's US$600m deal last week and Bci's US$500m deal in February are the first AT1s out of the region since November 2021 when Mexico's Banorte priced a US$1.05bn two-part benchmark AT1. The two deals are also the first AT1s to be publicly offered in Chile. Chile was a latecomer to Basel III among Latin America's major economies. Argentina, Brazil and Mexico began implementing Basel III rules in 2013 and were aligned with original BIS III principles by 2022, according to Fitch. Chile began in 2021 after passing a major reform in its banking legislation in late 2019. "The previous law was rigid. It did not allow banks, among other things, to weight assets by their risk to determine minimum amount of capital, making it impossible for the regulator to enforce Basel III standards," said Abraham Martinez, director for Latin American banks at Fitch. The new law established capital requirements that are identical to those of Basel III, permitting hybrid Tier 1 capital in the form of perpetuals or preferred shares to count for regulatory capital. Implementation started in 2021 and banks have until the end of 2025 to comply with requirements. A combination of volatile market conditions and the absence of specific regulations kept Chilean banks from coming to the market with AT1s after implementation began. A key norm that banks had been waiting for was the activation of the counter-cyclical capital requirement, which happened in May 2023. Then, in the second half of 2023, volatile Treasury yields kept issuers on the sidelines. A window opened this year thanks to increased visibility and certainty about the interest rate environment, in combination with liquidity that has built up on the investor side during the slow years of 2022 and 2023, a banker said. "The secondary market for AT1s has tightened significantly. And in this context, investors have shown more interest to play on the lower layers of the capital structure, such as AT1s, in search for yield," he said. The volume of AT1 issuance so far this year in emerging markets, at US$4.95bn, is higher than in all 2023 (US$4.4bn) and 2022 (US$4.7bn), according to IFR data. Major accomplishment On Thursday, BancoEstado's 7.95% perpetual non-call five-year AT1s, rated Baa3/BBB–, priced at par. Price thoughts opened at 8.25% area. "Piercing 8% was a major accomplishment," a second banker said. If Bci's AT1s are used as a comparable, fair value would be 8.375%, the second banker said. Moody's and S&P assigned Bci's AT1s Ba1 and BB+ ratings, respectively. Orders for BancoEstado's AT1s peaked at US$2.3bn and closed at US$2bn. Demand was lower than for Bci's US$500m 8.75% perpetual non-call five deal, which was 7.5 times subscribed. The BancoEstado deal had to battle against difficult market conditions following news that US economic growth had slowed by more than expected in the first quarter, and that the Federal Reserve may not cut rates before September due to an acceleration in inflation, which sent the 10-year Treasury yield at one stage on Thursday to more than 4.7%, the highest since November 2. BancoEstado still received substantial orders from high-quality accounts, the second banker said. Asset managers were the main buyers, with 80% of allocations, while hedge funds took 10%, pension funds and insurance companies 6% and others 4%. Around 60% went to the US and Canada, 30% to Europe, 7% to Latin America and the rest from the Middle East and Asia. BNP Paribas, HSBC and JP Morgan were global coordinators. Bank of America, Citigroup, Credit Agricole and Goldman Sachs were joint bookrunners. Short lived? The resurrection of AT1 issuance from the region could be short lived, however. Even though markets are open to
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