CASA: AT1 commitment

Crédit Agricole took its total AT1 issuance to some Eu3.8bn with a $1.25bn deal on 11 September, making it one of the most active banks in Basel III-compliant capital instruments. Here, Olivier Bélorgey, head of the financial management department, Crédit Agricole, and Bernard du Boislouveau, head of FI DCM France, Crédit Agricole CIB, discuss how Crédit Agricole is building its franchise in the hybrid market.


Neil Day, Bank+Insurance Hybrid Capital: This was your fifth contingent capital trade since you launched your inaugural Tier 2 hosted CoCo in September 2013. What is the rationale behind this latest AT1 transaction?

Olivier Bélorgey, Crédit Agricole (pictured above): The rationale is totally in line with our previous issues. That is: firstly, we want to strengthen the capital structure of the group in order to protect our rating and to comply with the expectations of the market concerning our capital structure. We have therefore reused exactly the same structure that we conceived in January and already reused in April, which is a dual trigger instrument with one trigger, the low trigger, at Crédit Agricole SA (CASA) level — which is the issuing entity of this instrument, and hence the trigger is a regulatory one — and we have added a high trigger, at group level — which is our own decision, because when we explain the strength and the capital structure of Crédit Agricole, we always refer to the group, so we also wanted this instrument to be linked to the group level.

Plus, more specifically for this issuance: it is part of the capital roadmap we disclosed to the market in our medium term plan, but we perhaps issued a little more quickly than we anticipated because of a methodological change by Standard & Poor’s regarding their evaluation of a hybrid instrument issued by our insurance company subsidiary. Since May these instruments are now, in the RAC calculation, deducted from our core equity Tier 1, whereas they were previously deducted from Tier 1 or Tier 2. This methodological change had an impact of 40bp on our RAC ratio, and even if we remain above the 7% threshold — which is very important for S&P in terms of RAC ratio — we had less room for manoeuvre, and we wanted to restore this room. That’s why we issued a little more quickly than the market, perhaps, and we, anyhow, anticipated in April.

Bernard du Boislouveau, Crédit Agricole CIB: We can also say, Olivier, that the timing of the issue was linked with the fact that the market is in a quite good shape, no?

Bélorgey, Crédit Agricole: Yes. Finally, even if the market is clearly heavier than during the first half of the year, it remains good— especially for issuers that have a good track record in this type of instrument, or issuers with highly appreciated names in the market. HSBC, for instance, who came the day before us, and ourselves — these two issues were, I think, well received by the market with large order books.

So, the market is of course heavier than in the first half, but in a sense it’s a market more balanced between issuer and investors — and anyway we didn’t expect this euphoria of the first half to last forever.

Day, BIHC: Every time you’ve done an AT1 transaction, you’ve done a roadshow. Why do you place so much importance on this?

Bélorgey, Crédit Agricole: These are high yield instruments, and even if it’s the forth or fifth time we are issuing, and even if some issuers have used this instrument many times now, it remains rather a new instrument, with a level of risk that is clearly not at all the risk of senior unsecured issuance. We therefore think that it remains important for us to go and see the investors to re-explain all the features.

And, to be honest, each time we have done so we have seen the market evolving and investors focusing on more and more detailed and specific elements of the structure and regulations. As evidence of that, I would say that in January the market was very focused on the write-down mechanisms and all the buffers before write-down – and that’s practically all that was focused on. After that, in April, the market was focused on the mandatory distribution restriction — and this was natural, as it is a very pertinent issue. So the market has understood, OK, I have big buffers before write-down, but will I receive my coupon? Because in the regulations there are some elements that are tricky to understand in relation to cancelling the coupons. So the market was focused on what these elements are, what kind of buffer there is before that eventuality. And right now, in September, the market was even more precise: on top of these buffers in relation to coupon cancellation, they also focused on what we call distributable items that you have in order to pay the coupon.

So we think that the market is not yet mature, and that it was worth doing another roadshow. And I think also it’s a sign of respect towards investors to come and see them face to face, one on one, when you sell this kind of high yield instrument.

Day, BIHC: Were there any structural changes for this new issue?

Bélorgey, Crédit Agricole: There were only two very small amendments to the structure, both dictated by regulatory developments. One concerns the contractual acknowledgement of the EU authorities in terms of bail-in as this new paper is issued under New York law, and the other element concerns the cap on the maximum write-down amount. I won’t enter into the details here, because it is very technical, but clearly these was only very minor adjustments that were necessary given in light of clarity on the regulations.

Du Boislouveau, Crédit Agricole CIB: And we can say that during the roadshow — whether in London, New York or Boston — this structure was very well understood, and we had no specific questions on the already well-benchmarked dual trigger structure, to be frank.

Bélorgey, Crédit Agricole: Yes, and I think that the investors responded very well to the fact that we took the time to explain these little differences, which were very technical.

Du Boislouveau, Crédit Agricole CIB: One thing that is very interesting that we heard — not during this roadshow but the previous one — is that some of these investors want to be treated similarly to equity investors. That’s the reason why they want to be as close as possible to issuers, and that’s also probably the main reason why CASA is spending so much time on the road, explaining its funding strategy and especially what it intends to do with this type of instrument.

Day, BIHC: Did the aftermath of BES present any challenges?

Bélorgey, Crédit Agricole: Our CFO did a wonderful job in this respect when explaining the first half results, and to be honest only perhaps one-third of the investors asked us about BES, and it was more or less to have confirmation of what our CFO explained in August. So it was not a problem.

Day, BIHC: Why was a PerpNC5 structure chosen? Did you consider a long five year non-call period like Société Générale or HSBC?

Bélorgey, Crédit Agricole: We told investors that we were very flexible on the date of the first call, either non-call five or non-call 10, and we just gathered up investors’ requirements and chose the maturity that fitted the majority of them. And after that we chose to be very simple.

Day, BIHC: How much have you raised in AT1 format so far and what are your plans by 2016? Will we see CASA back in the capital space soon?

Bélorgey, Crédit Agricole: We have already raised Eu2.9bn plus this one, which was just over Eu0.9bn, so we have already raised a little more than Eu3.8bn. Our target for the medium term plan for the period 2014-2016 was Eu4bn plus. Due to the methodological change of S&P, during the roadshow I indicated to the investors that our revised target will probably ultimately be more around Eu6bn than Eu4bn.

We will be a little opportunistic and it will depend on the appetite of the market and so on and so forth, but we don’t need to return to market very quickly in the coming months. That leaves around Eu2bn for the next two years.

In our medium term plan we disclosed a capital plan whereby we do not issue any Tier 2, but I clearly indicated to investors that this medium term plan was built without taking into account all the discussions concerning MREL and GLAC or now TLAC. Obviously these discussions will now steer us to issue some Tier 2 one day. I don’t know exactly the quantum, but the next move will also be in the direction of Tier 2. Right now it’s really too early to give the market precise indications.

Another thing I mentioned to the investors is that due to the methodological change made by S&P on the hybrid instrument issued by our insurance company, it gives us some more economic incentive to issue hybrid instruments through our insurance company directly into the market, rather than the current situation, where all its issuance was subscribed by Crédit Agricole SA and the banking side. Due to the evolution from Solvency I towards Solvency II, it would have been efficient to issue directly from our insurance company into the market from 2016, but this S&P methodological change makes it relevant right now. So I also indicated that we had different instruments available to partially compensate for S&P’s change, either issuing a little more at bank level and also issuing potentially — it’s not a commitment — partly through our insurance company.

Day, BIHC: This was the first time that you have appointed a sole bookrunner for a deeply subordinated US dollar transaction. Were you satisfied with the structure of the syndicate, the pricing parameters and quality of the order book?

Bélorgey, Crédit Agricole: Absolutely. Our CIB has made a lot of progress, and a lot of investment to be in that position and to be credible in that role. In fact it’s also part of our medium term plan objective for our CIB. The market was a little surprised by our ambitions in terms of the CIB business. We explained that we deleveraged a lot during the crisis, perhaps more than some competitors, and that right now, in a client-driven environment and business, we wanted to invest more in what we call our CIB debt house. We therefore invested in this fixed income platform, and to be honest the results have reached our targets. On this transaction the syndicate was successful, while the sales team did a wonderful job. We had more than 400 clients — that’s clearly a great result.

Du Boislouveau, Crédit Agricole CIB: The main thing I would take away from this transaction is the focus the issuer placed on trying to be as consensual as possible and acting in the way investors expect when bringing a transaction to the market. The issuer is clearly showing that it invests time in a dialogue with its core investor base for these high beta transactions, as demonstrated by the success of this deal. Despite the fact that a couple of recent transactions were put in the market in a much more awkward manner, Crédit Agricole managed to garner a book of $7.5bn with a good spread performance after the break, and it is still the case today. This proved that the way CASA is executing its global funding strategy and tactics for its funding is spot-on.

Day, BIHC: What do you expect from the forthcoming AQR?

Bélorgey, Crédit Agricole: I cannot disclose anything. What I should indicate to the investors is that we don’t expect any material impact from the AQR.