Crédit Agricole points to AT1 future
Crédit Agricole’s $1.75bn perpetual non-call 10 Additional Tier 1 transaction in January got the CoCo market off to a pioneering start for 2014. Neil Day spoke to Bernard Delpit, Crédit Agricole Group CFO, and Olivier Bélorgey, head of the financial management department, Crédit Agricole SA (CASA), about how the transaction fits into the French group’s broader capital plans.
Bernard Delpit, Crédit Agricole Group CFO. Photo: Hervé Thouroude
How long had you been considering this inaugural CRD IV AT1, and what were the major obstacles that had to be overcome before issuance?
Bernard Delpit: We’ve been working on new hybrid capital for one year. In September, CASA issued a CoCo Tier 2 and the disclosure of our fully-loaded ratio on 7 November paved the way for our inaugural AT1. We therefore actively worked on it from November, and the only other hurdles were technicalities that we solved from a legal perspective and from a structuring perspective in December.
How did the “dual-trigger” affect the marketing of the trade?
Olivier Bélorgey: When we first released the structure in the market, the syndicate of course had some feedback from investors asking: what is this dual-trigger, where is it coming from, and so on. But we began the roadshow just after releasing the structure and all the answers we provided investors with were very quickly accepted and well understood.
In fact the dual trigger has a very strong relationship with the rationale for the deal. We had to include a trigger at CASA level due to legal requirements: it’s an issuance made by Crédit Agricole SA, so, according to CRD IV, we had to introduce a trigger at the level of CASA. But — as we have been explaining to the market for many years now — when you are assessing the solvency of Crédit Agricole, you first have to look at the group level, so on top of this regulatory constraint we wanted to add something linking this AT1 issue with the group level. Concerning the group, we wanted firstly to be consistent with the Tier 2 issue’s trigger at 7% CET1, and secondly, we wanted to position Crédit Agricole Group clearly within the best market standard when it comes to G-SIB institutions and the going-concern framework. It was not the same for Crédit Agricole SA — due to all the internal support mechanisms we only intend to put Crédit Agricole SA at an adequate level in terms of capital.
At the beginning of the transaction our advisers were telling us that perhaps the trigger and its complexity could cost us something between 25bp and 50bp, but at the end of the day it didn’t cost anything.
During the roadshow, did investors ask a lot about Crédit Agricole as a credit? What did they focus on most?
Bernard Delpit: Indeed questions from investors tackled both the features of the instrument and the credit of Crédit Agricole. The somewhat unique structure of the group was discussed. The normalisation of our situation in the past year was well perceived by investors, Credit issues were quite easily answered and people focused on the features of the instrument. Credit was not really, I think, at the heart of this transaction since we’ve done a lot to demonstrate that Crédit Agricole is back on track in terms of liquidity, profitability and earnings visibility.
What was your rationale for the non-call 10 choice?
Olivier Bélorgey: In fact we indicated to the market that we were ready to issue non-call five or non-call 10, and we were waiting for the market’s answer. The market was mainly in favour of a non-call 10, so that element of the structure depended on investors.
And on the other hand, from a pure ALM point of view, given the total size of AT1 we should have as a target in our capital structure we are more at ease with a non-call 10 instrument, with implicit pressure from the market to refinance the instrument at 10 years rather than five years even if it is of course a perpetual instrument.
Did you consider going down the euro issuance route?
Olivier Bélorgey: We are totally open to it, but obviously in the current market high yield instruments are better appreciated by US dollar investors rather than euro investors. So it was not a strong preference on our side, but clearly we follow market appetite.
What can you say about how you plan to use the variety of hybrid instruments available?
Olivier Bélorgey: It was also part of the rationale of the transaction — which we clearly explained to the market — to follow the capital plan we released to the market in November, which is for Crédit Agricole Group to reach a total solvency ratio of 16.5%, 13% consisting of Common Equity Tier 1 — which is a very high level — and the remaining part consisting of 1.5% of Tier 1 and 2% of Tier 2.
Given our starting point, with 1% of Tier 1 and 3% of Tier 2, we clearly have an initial focus on Additional Tier 1, so that’s why we began 2014 with AT1, and we indicated to the market that it will remain our main focus for the coming months.
Bernard Delpit: If I may elaborate on that: we are definitely in the category of banks that will structurally accumulate Core Tier 1 for two reasons. The first one is that at the heart of Crédit Agricole are co-operative banks, which basically pay no dividends, and since 56% of the listed entity is owned by the regional banks 56% of what it pays out stays within the group. So thanks to our structure, and thanks also to our business model, retained earnings will drive us to this high level of Core Tier 1. So that explains why we have a high level of Core Tier 1 in our capital planning.
And, as Olivier said, we want to add 1.5% AT1 at the group level for different reasons, including regulatory reasons, and going from 1% to 1.5% at the end of 2015 means that we will be an active player on this AT1 market. On top of that we have to offset the grandfathering of old-style Tier 1, so although we have not disclosed the amount we will issue, it will be quite significant, and we will be coming back to the market every year to raise AT1.
Olivier Bélorgey: We did not provide the figures publicly, because we want to retain flexibility on amount and timing, but we clearly indicated that we would come back. And we also indicated that the structure of the instrument is built to be more or less reused in further issuance, perhaps with some minor evolution due to regulations.
What are the major challenges for the Crédit Agricole Group over the next few years?
Bernard Delpit: Most of the adaptation has already been undertaken in terms of business, geographic scope and capital planning. We are now working more on leverage size. We will focus on reducing the total size of Crédit Agricole’s balance sheet, and we will focus on the bail-in issue. And from both points of view — leverage and bail-in — AT1 is a key element of our strategy.
We have seen French banks making up a high proportion of Tier 2 and AT1 issuance in Europe as the market has taken off. Is this a coincidence or is there a trend?
Bernard Delpit: From 2011 to 2012 our supervisor was not really eager to see French banks issuing hybrid capital instruments. The key message was to focus on Core Tier 1. But you can’t build a comprehensive capital structure with only Core Tier 1.
In 2012, for rating reasons — to support our RAC ratio from S&P — and for regulatory reasons, the French supervisor gave a green light to the issuance of new instruments. That’s why we saw French issuers very active in the market.
For more on Crédit Agricole’s AT1 transaction, read: