And though it might not be a “one size fits all” solution, issuers and investors could benefit from including them more often.
Bankers have often unofficially invoked greenshoe clauses in bond transactions, telling investors that the issuer reserves the right to increase the size of a deal if the pricing is particularly attractive. But UBS, which was sole lead on the €3.04bn equivalent deal, was the first to put a greenshoe into AT1 deal documents, and it did so with a different motive entirely.
The bank included the option to increase the deal’s size, in conjunction with taking out a short position on the bonds, in order to ensure its price stability in the secondary market by signalling to investors it was ready and able to make a market for them.
The bonds brought in well over €10bn equivalent of orders and traded up impressively, and UBS exercised the greenshoe option to cover the short at the original price.
Some have said that executing this kind of trade with several lead managers involved would be impossible. But lead managers including UBS have used this tactic when selling core capital deferred shares — a kind of equity-like instrument for borrowers with no equity — for one of the UK’s building societies. Each active lead reserves the right to a greenshoe, takes out a short position on the instrument, and closes whatever short they have left to cover by partially or fully executing the greenshoe.
The only real risk, it seems, is to the issuer, whose full target may not be reached if the entire greenshoe is not exercised.
For a volatile asset class in a volatile market — and one which badly needs to grow and instil further investor confidence — this is a structure that can work for many borrowers. And with liquidity tight as it is, this strategy provides an extra incentive to investors who may otherwise shy away from AT1 at a time when banks cannot afford to lose them.