It did not take long for the impact of the European Commission’s banking reform package, announced on November 23 last year, to be felt in FIG. There has been a deluge of TLAC (total loss-absorbing capacity)-compliant issuance from European banks racing to meet their commitments as the 2019 compliance deadline looms.
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Olivier Irisson, |
The pace of issuance has been such that it has occasionally resembled a pile-up: on January 3, BNP Paribas announced senior non-preferreds in euros and dollars on top of Crédit Agricole, which also launched its own five- and 10-year dollar deal. The two banks issued $4.5 billion between them in the same week.
The EC had been fretting for some time as the number of TLAC solutions in different member states has multiplied.
“Such discrepancies have the potential to amplify uncertainty for debt issuers, investors and resolution authorities and to make the application of the bail-in tool in cross-border resolution cases legally more complex and less transparent,” it declared in its November 23 press release.
“Clear, harmonized rules on the position of bond holders in the bank creditors’ hierarchy in insolvency and resolution could facilitate the way bail-in is applied, by providing greater legal certainty and reducing the risk of legal challenges.”
It therefore proposed a new statutory category of unsecured debt that would rank just below senior debt in resolution, while remaining part of the senior unsecured debt category.
The new instrument, as expected, copies the French senior non-preferred instrument that passed into law on December 10 last year, under the Sapin 2 law.
Spreads have come off a bit given the amount of issuance, but the market has been amazingly robust - Alexandra MacMahon, Citi
“We now know that the preferred format to fulfil TLAC and MREL (minimum requirement for own funds and eligible liabilities) is in line with the French non-preferred senior bond,” says Demetrio Salorio, global head of debt capital markets at Société Générale Corporate & Investment Banking. "The investor base is keen – they are far more at ease with the instrument than they were 18 months ago and spreads could tighten."
Crédit Agricole and Société Générale were first out of the gates at the end of last year.
The former issued a €1.5 billion 10-year deal and the latter a €1 billion five-year trade.
BNP Paribas launched its programme in January with the first dollar deal in the new instrument and a six-year euro bond as well.
BPCE issued its first non-preferred deal in the second week of the year, a €1 billion six-year trade that attracted $2.4 billion of orders. It has subsequently also launched a samurai non-preferred trade.
“It’s a very good compromise for investors and banks to manage TLAC, and the signs so far are positive,” Olivier Irisson, executive chief financial officer at Groupe BPCE, tells Euromoney. “There’s huge demand from the market, as the risk is very limited.”
So far the deals from France have priced some way back from their opco equivalents: the Crédit Agricole 10-year priced 70 basis points wider.
In the UK, the spread differential between holdco and opco deals has been around 40bp to 50bp.
Roughly €55 billion TLAC-compliant issuance is expected from France, €30 billion of which could come from BNP Paribas alone.
Expected volatility
The European Banking Authority has estimated a €310 billion gap in all the region’s banks meeting their TLAC and MREL requirements before the 2019 deadline. That raises questions about how this volume of issuance should best be managed in the face of expected political and market volatility.
That will, inevitably, come down to price.
“Investors are happy to see something with some spread on it,” says Alexandra MacMahon, head of EMEA DCM at Citi. “Spreads have come off a bit given the amount of issuance, but the market has been amazingly robust.”
She says that the differential with opco senior will diminish: “The spread that the French issuers ended up paying over opco was slightly wider than expected, partly because opco bonds had tightened on expectations of diminished supply in that format. However, opcos have now unwound some of their technical tightness.”
SocGen’s Salorio agrees that there is little concern over investor appetite, but that issuance will need to be managed carefully around anticipated volatility associated with the upcoming Dutch and French elections.
“Eighteen months ago, investors were saying the point of non-viability and the point of resolution were not very far away from each other so were asking for spreads on these instruments that were commensurate with tier 2,” he explains. “Since then we have worked hard to prove how write-downs for the different instruments in the waterfall are substantially different upon losses, and the general sentiment towards the financial sector has much improved. Now these instruments can be priced off senior rather than tier 2.”
Now that TLAC compliance has been harmonized, Banco Santander will probably be keen to crack on with its programme even though the new instruments have yet to pass into Spanish law. With €30 billion TLAC-compliant debt to issue as well, it will likely issue opco bonds that incorporate an option to switch into bonds compliant with future legislation that transposes the European directive into Spanish law.
These 'flippable' bonds will enable the Spanish bank to tap into the current enthusiasm for senior non-preferred bonds while investors are still flush with cash at the beginning of the year.
