Among the standout transactions of the past year was a ground-breaking deal that cut a new and efficient path for Chilean and other financial institutions in Latin America to strengthen their regulatory capital positions.
Chilean bank BCI’s issuance of $500 million in 8.75% AT1 perpetual notes last February marked a return by the bank to the 144A/Reg S market after a more than two-year gap.
The deal, which wins the award for Financial Institution Deal of the Year, marks the first hybrid capital issuance from a Latin American bank following Credit Suisse’s write-down of its AT1s in 2023, reopening the market for the region that had been dormant for over two years.
What’s more, BCI’s inaugural AT1 re-established hybrid capital as a cost-effective way to capitalize financial institutions in the region, paving the way for other banks to follow.
Javier Moraga, manager of BCI’s Investments and Finance Division, explains that the deal, which wins fits well with the implementation of Basel III regulatory requirements in Chile’s banking market, breaking new ground by introducing a security that can help financial institutions comply with the new rules. The money raised by a perpetual bond of this kind can be considered as Tier 1 capital from a regulatory point of view, reducing the need for shareholders to fork out money for capital increases.
“BCI has been preparing itself for several years to meet the requirements with some room to spare,” he says. “We worked for a long time on this deal, which demanded interaction with the regulatory body, as it was a learning experience for them as well.”
Moraga says that collapse of Silicon Valley Bank and Credit Suisse in 2023 created fresh challenges. Amid the ensuing banking turmoil, regulators, especially in Switzerland, issued rulings about perpetual bonds that compounded the uncertainty in the market.
In order to assuage any concerns, Moraga notes, BCI’s financial and legal advisors were deeply involved in structuring the bond. By the end of 2023, after the Chilean supervisors cleared the runway with some clarifying rules, the bank decided it was ready to take advantage of the first window of opportunity in international markets. The bond was issued the following February 1.
The success of BCI’s AT1 confirmed that investors are still comfortable with the instrument for high quality financial institutions in the region. “We were much surprised to see that investors received the deal very well,” he says.
The majority of orders came from dedicated emerging market accounts, with a select few AT1-focused accounts and yield-hungry cross-over US investment grade investors. Demand was sufficiently robust for the issue to price through guidance of 8.85% to launch the transaction at 8.75%, representing a spread compression of 62.5 basis points, according to BNP Paribas, joint-bookrunner on the deal.
“It offered a super attractive yield given the ratings of our bank and the sovereign rating of Chile, which are both very good,” Moraga says.
Despite being a perpetual note, BCI has the option of buying it out every five years. The bond ended up being seven times oversubscribed, despite the fact that it was the first AT1 perpetual bond ever issued by a Chilean bank in international capital markets. It was so successful in fact that BCI decided to place a new, $500 million AT1 perpetual bond in September, which was 3.5 times oversubscribed.
“BCI is a regular visitor to capital markets, and we plan to continue offering debt instruments in the future,” says Moraga.
Joint Bookrunners: BofA Securities; BNP Paribas; HSBC
Issuer’s Counsel: Dentons; Ried Fabres; Simpson Thacher
Bookrunners’ Counsel: Carey; Cleary Gottliebq
All supporting financial institutions and law firms were transmitted to LatinFinance by the award category winners. For updates please email awards@latinfinance.com