UPDATE 3-BBVA tests post Credit Suisse demand for euro-denominated AT1 bonds

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BBVA sells 1 bln euros in AT1s, demand of 3.1 bln euros

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BBVA new AT1 to pay 8.375%, below initial 8.75% guidance

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Bank of Cyprus sells 220 mln euros in AT1s

(Adds quote in paragraph 6 from a head of trading, includes shares in paragraph 11)

By Jesús Aguado, Chiara Elisei and Yoruk Bahceli

MADRID/LONDON, June 13 (Reuters) - In a first since the rescue of Credit Suisse, Spain's BBVA and Bank of Cyprus tested demand for euro-denominated contingent convertible (CoCo) bonds on Tuesday.

A decision by the Swiss regulator in March to write down $17 billion of Credit Suisse additional tier one bonds (AT1s) as part of a forced takeover by UBS roiled the market, leaving investors uncertain about its future.

In what some market participants said was an attempt to restore confidence in the riskiest bank debt, Tuesday's new debt sales totalled more than 1.2 billion euros ($1.3 billion) and met with strong investor demand, with the final coupon lower than earlier indications.

BBVA's new deal "could be a very significant positive development for the AT1 market, and could be the catalyst that investors have been waiting for," Eoin Walsh, partner at TwentyFour Asset Management, said in a note.

The Spanish bank said it sold 1 billion euros in AT1 bonds following investor demand of 3.1 billion euros, in the first perpetual bond it had issued since July 2020.

"The strength of investor sentiment in corporate bond markets is on show today, as we’re seeing the first euro-denominated Additional Tier 1 (AT1) deals come to market since the Credit Suisse crisis," said David Everson, head of trading, fixed income EMEA at Liquidnet.

The final size of the bond was at the upper end of the 750 million to 1 billion euro range it was aiming to raise.

BBVA set an interest rate of 8.375%, below its initial guidance of 8.75%, with a redemption window on Dec. 21 2028.

Separately, Bank of Cyprus sold 220 million euros in AT1 bonds, a lead manager memo seen by Reuters showed.

The bonds, which IFR reported had orders of 2.75 billion euros, will pay a coupon of 11.875%, below a 12.5% rate originally offered, the memo added.

Shares in Bank of Cyprus closed up 1.35%, while shares in BBVA fell 0.34%.

MARKET RECOVERY

The market for AT1 bonds, which lenders can use to beef up Tier 1 capital reserves, froze after U.S. banking failures and the rescue of Credit Suisse.

A banker with knowledge of the deals noted that credit markets have recovered since then and it was matter of time for banks to try and sell new debt again, showing that concerns about the future of the AT1 market were largely overdone.

BBVA said the new debt will provide flexibility to meet the redemption options of previous AT1 issues, the earliest of which is a 1 billion euro CoCo with a coupon of 5.875% that can be repaid on Sept. 24.

ING said the new bonds made it "very likely" that BBVA would call its 5.875% bond in September. The price of that bond was up by over one cent on the euro on Tuesday.

BBVA declined to comment on whether it will call the bond in September.

ING also said that if the existing AT1 is not repaid in September, its coupon would be reset at 5.66% above the five-year swap rate, not far off the levels where the interest on the new bond is guided.

Banks usually sell AT1s, which are perpetual bonds, with five years, before an option to repay is triggered.

BBVA said its CoCo bond on Tuesday was underwritten by Barclays, BBVA, Bank of America, Citi, Goldman Sachs and Natixis. Its issue was part of a 2023 financing plan and was its fifth debt issuance so far this year. ($1 = 0.9265 euro) (Reporting by Jesús Aguado, Chiara Elisei and Yoruk Bahceli; Editing by Louise Heavens, Ed Osmond and Alexander Smith)