Crédit Agricole: Navigating different markets

Much has changed since Crédit Agricole SA first accessed the US dollar Additional Tier 1 market in January, meaning a flexile approach was adopted for its latest AT1. Here, Vincent Hoarau, managing director, head of FIG syndicate at Crédit Agricole CIB, discusses how CASA’s track record supported execution and how CACIB is developing its hybrid franchise.

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What factors influenced the approach to pricing?

Vincent Hoarau, Crédit Agricole CIB: The pricing rationale looked straightforward at first sight. CASA’s 7⅞% 01/29/49 was bid at 105.75%, or 7.10% in yield-to-call and an I-spread of 450bp before the initial price thoughts were announced.

Based on pricing levels for HSBC’s US dollar PerpNC5 and PerpNC10 the previous day, the curve was flat between five and 10 years. With the five year US dollar swap rate at around 1.95% during the process, the area of mid-6% YTC looked like fair value.

Nevertheless, Société Générale’s curve was strongly inverted, with a spread differential between its 6% 10/27/49 (NC5) and 7⅞% 12/29/49 (NC10) of around 40bp. On this basis many investors argued for a higher coupon level. Meanwhile, some key investors saw a credit spread differential of 100bp between an investment grade HSBC AT1 and non-investment grade CASA AT1. HSBC’s PerpNC5 was priced at 5.625% the day before CASA priced. Finally, some opportunistic buyers highlighted an eye-catching 7% coupon mark as the lowest level at which they would commit in primary.

Given market circumstances and investor behaviour in previous deals, we could not afford to ignore that. We therefore tried to adopt a consensual approach, but kept in mind the range of 6.5%-6.75% as a pricing target subject to the new issue premium ultimately requested. We set IPTs at 6.75%-7% early morning, and in doing so incorporated the wide range of investor feedback. We verbally gave guidance to investors on sizing, saying that $1.5bn was off the table, and incorporated a scarcity element in the process while ensuring a strong bookbuilding process.

When books crossed the $5bn mark we refined guidance to 6.625% (+/- 0.125%) and waited for the New York open and further traction from US investors to fix the coupon and announce a transaction of $1.25bn. Books closed around the $7.5bn mark, with more than 400 investors engaged.

CASA has been very active this year in the AT1 space while the market turned less issuer-friendly. Did you feel any kind of “CASA fatigue”?

Hoarau, CACIB: Not at all. The perception of the signature has improved significantly since the darkest phase of the crisis and the sale of Emporiki. The equity story and the solid credit spread performance is a perfect illustration of the appetite for the signature. Elsewhere, outstanding CASA AT1s outperformed the rest of the market during the sharp correction move in early August. Investors like that. So the appetite for the credit is intact and real money investors continue to increase exposure. They love the retail-focused business model of the group, the level of capital generation, the group guarantee mechanism, but also the levels of distributable items.

Did you experience any resistance to pricing?

Hoarau, CACIB: Resistance to the IPT level was virtually non-existent since we adopted a consensual attitude and listened carefully to investors. Nevertheless, there are lot of opportunistic and fast money investors out there. Some of them dropped out when we fixed the coupon at 6.625%. The size of $1.25bn was widely accepted.

The USD AT1 curve of your direct peer Société Générale is inverted, but CASA’s PerpNC5 was priced flat to the outstanding PerpNC10 launched in January 2014 — how come?

Hoarau, CACIB: HSBC had set fresh references in the market, pricing NC5 and NC10 tranches in US dollars flat to each other in terms of spread versus swaps. So there was no point in considering Société Générale’s outstanding curve. In the secondary market there are lot of anomalies and sometimes outstanding references are bad guides.

You executed this USD RegS/144a transaction intra-day, while you adopted a longer execution timeframe for the inaugural trade. Why was that?

Hoarau, CACIB: You are right. Back in January, when we executed the inaugural US dollar AT1 trade, we opened books in Asia hours and continued bookbuilding into European and US hours. But the markets have proven to be very volatile those days — overnight risk is back — and the investor mood is also very erratic, while we did not expect much traction out of Asia. Markets and investor behaviour have changed, so we adapted the execution strategy accordingly and executed the transaction intra-day.

Regarding the profile of Asian demand, it has changed drastically since the beginning of the year. We see more institutional-style buy-side accounts and hedge funds involved. Asian private banks have almost left the market and their strong participation in the inaugural HSBC AT1 transaction was due to the investment grade profile of the trade and, more importantly, the footprint of the issuer in the region.

Were you satisfied with the bookbuilding process and the quality of the order book? Did you see any major change in the distribution profile?

Hoarau, CACIB: We were extremely satisfied. It was key for us to demonstrate that confidence had been restored in the AT1 segment. And $7bn and 400 investors is a strong headline, no?

But the inaugural CASA US dollar AT1 transaction attracted $24bn with more than 900 investors involved. How do you explain the difference?

Hoarau, CACIB: Demand out of Asia has decreased significantly, with limited support from private banks in AT1s. Lot of fast money, opportunistic buyers and low quality hedge funds across Europe also quit the segment since the sharp correction in August. In general, investors are much more selective and price sensitive, so the profile of the books and sizes change. More importantly, order inflation has disappeared in most transactions. In primary we will observe a strong differentiation going forward. Inaugural core AT1s will be synonymous with frenzy and inflation, and the others with sober investors.

How did the deal perform in the aftermarket?

Hoarau, CACIB: The bonds traded up off the break, up to 100.5% and down to 99.50% one day after pricing, before stabilising around par. As mentioned earlier, the level of inflation in this trade was very limited and the final size of the book reflected the real size of the demand. So a secondary trading level close to par implies pricing and sizing were spot on.

This was CACIB’s debut as sole bookrunner for a deeply subordinated US dollar-denominated transaction. Did you experience any specific challenges and were you satisfied with the overall outcome?

Hoarau, CACIB: We were sole bookrunner for CASA’s inaugural euro-denominated AT1 transaction back in the second quarter. So the sole bookrunner role for a US dollar benchmark was a natural objective for the capital markets franchise. Working alone for the mother company is a challenge per se. There is zero tolerance and you must tick all the boxes. You can’t rely on a group of banks.

When we look at the pricing level, aftermarket trading as well as the quality, granularity and overall size of the order book, we are highly satisfied. Over the last two years, CACIB has invested a lot in the hybrid franchise, particularly in the distribution capacity of the US dollar platform. Now, we have a strong set up in place with Coverage, DCM, Capital Solutions, Syndicate, Trading, Sales and Research fully aligned.

How do you expect the AT1 market to evolve for the rest of the year?

Hoarau, CACIB: In Europe, I think we will face some hectic moves around the AQR announcement while the geopolitical environment will remain unstable for some time. Volatility in equities might increase again, with some spill-over effects in the AT1 space, which is highly correlated with the evolution of stock markets.

Spreads should find a floor for the rest of the year, with the 5% coupon mark as a critical resistance level and zone of profit-taking.