Crédit Agricole Tier 2×2

Crédit Agricole on 9 March sold the largest ever Tier 2 issue, a dual-tranche transaction comprising Eu2bn and $1.5bn pieces that attracted record demand and constituted the first dual-tranche Tier 2 benchmark. Here, Olivier Bélorgey, head of the financial management department, Crédit Agricole, outlines the issuer’s strategy, while Bernard du Boislouveau, head of FI DCM France, and Vincent Hoarau, head of FIG syndicate, Crédit Agricole CIB, offer their market insights.

This is your first Tier 2 transaction since October 2010. What drove your choice of tenor and currency, and notably the dual currency format?

Olivier Bélorgey, Crédit Agricole: Before going into the specifics of this transaction, let’s concentrate first on the rationale for the deal and get the full picture from our perspective as an issuer: it is fair to say that Crédit Agricole SA benefits from a good relative positioning versus its peers, thanks to the consistent strategy implemented over recent years, putting the Crédit Agricole Group back on track after a more difficult period, when the Group had to redefine its strategy. This period is behind us and we have had the opportunity to gauge the strong market sentiment toward our signature thanks to regular roadshows and the successful transactions we have executed over the last 18 months. Our marketing of the trade during the week of 2 March, following the publication of our 2014 results in February, further reinforced this positive perception.

If we can now elaborate more on the actual Tier 2 decision, our wish at Crédit Agricole SA level is to reach the 8% level for the MREL ratio by end-2016 and a minimum TLAC ratio of 19.5% (subject to changes in RWA calculation methodology) including buffers by 2019 whilst excluding senior unsecured debt. Why do we have these objectives? This is because we need to protect our market access, considering that, due to the French “bancassurance” model (i.e. French banks typically incorporate insurance operations in their business), our loan-to-deposit ratio is structurally above 100%, with life insurance contracts being a pivotal form of saving for French customers. Under these circumstances, ensuring open access to wholesale funding is thus something we need to protect.

Turning to market considerations, it’s clear that many G-SIBs will be keen to enter the Tier 2 market, and for significant amounts, if our assumptions are correct. For that reason, why wait when the market trend is positive and investor appetite confirmed? But – and this is very important for our funding strategy – we want to have a clear dialogue with our investor base: we want to communicate transparently our needs, i.e. Eu3bn in each of 2015 and 2016, and, markets permitting, we were keen to raise the entire Eu3bn yearly size in one transaction in order to bring predictability and an offering consistent with our needs. As an add-on, and to differentiate Crédit Agricole Group, it’s fair to say that the global needs for Tier 2 issuance from major banks are not always clearly stated. Presenting this transaction as a unique opportunity for investors to participate in a Tier 2 issue of Crédit Agricole Group, after an absence under this format of some four years, brings clarity to the funding strategy and the way this strategy is perceived. The idea is to not come back with another Tier 2 issue in benchmark format in euros or US dollars in 2015. The success of this trade fully vindicated our strategy.

Vincent Hoarau, CACIB: We felt the market would be receptive to a jumbo transaction. The liquidity situation is extraordinary and the start of QE by the ECB offers huge traction to any type of transaction in the primary market. The impact of the ECB stimulus is spilling over into all asset classes, including subordinated debt. The performance of other recent euro Tier 2 benchmarks also paved the way for landmark execution combining euro and US dollar offerings to maximise size, without damaging the secondary market performance.

It was clear from the outset that our approach to pricing had to be consensual. Crédit Agricole SA was also very transparent with investors during the roadshow on subjects such as capital planning and MREL/TLAC projections. A combined target size of Eu3bn equivalent had even been openly communicated to investors met in France, Germany, the UK, New York and Boston. The issuer did not want to surprise anyone and was aware that the size element can be decisive in the subordinated market. The 10 year bullet structure in US dollars was practically fixed at the beginning of the roadshow since this is a pretty obvious tenor for the US investor base. That left a 12NC7 or 12 year bullet structure for the euro leg. We even considered a 15 year bullet. 10NC5 is not a relevant structure with regards to TLAC regulation given the start of TLAC application in 2019. By the end of the roadshow we received confirmation from euro investors that 12 year euros and 10 year US dollars was the combination of choice.

Wasn’t launch a little challenging given the execution risks across two tranches? What did you take into account when planning global execution across various time zones and investor bases?

Bélorgey, Crédit Agricole: Market conditions were globally supportive across markets. On top of this, US dollar investors have a positive view of Europe. As I said, we chose to have a clear, unambiguous communication with investors following our 2014 results on potential TLAC/MREL needs, explaining clearly the deal rationale.

We know, thanks to our experience in the subordinated market – and please refer to the four AT1 transactions we did during 2014 – that top investors can take multi-currency exposure on a given name, hence the strategy of offering the euro first, then opening the US dollar tranche at the US market opening, to ensure investors have a real-time view of their global exposure across tranches.

Benchmarking the euro first was also a way of sending a strong signal to the US investor base, taking into account the strong performance both in terms of relative pricing and investor reach.

Combining a euro and a dollar was also in line with our wish of targeting the most liquid markets, where the Group also has natural RWAs and where we have already benchmarked the name in subordinated format via the 2014 AT1 offerings. We are proud to say that Crédit Agricole SA as an issuer is now benefitting, deal after deal, from one of the strongest footprints in the market. But, again, this is no miracle. This comes from the time invested during all our past roadshows. Investors do value this. I should also add that Crédit Agricole at Group level has the second strongest Tier 1 ratio amongst the European G-SIBs. Again, no miracles here, just the return on investment of a successful balance sheet restructuring.

Bernard du Boislouveau, CACIB: We considered execution over two days, but when the market showed evidence of a softer tone on Monday we decided to pull the trigger immediately, feeling that the correction could last more than a day after the very good sessions enjoyed the previous week. We also knew that demand out of Asia would be limited, so having books open overnight was not a sensible option. Risk of arbitrage and cannibalisation was extremely limited given the differentiation in tenors and the strong appetite of investors across the board for the signature in Tier 2 format and across currencies.

What was the pricing rationale?

Hoarau, CACIB: The recent BNP 2.375% 17/02/25 10 year bullet Tier 2 opened at i+150bp bid on the morning of execution, while Crédit Agricole SA does not have any recent Tier 2 deals outstanding. Its last benchmark was launched in October 2010, so in any case was not a relevant comparable. Discounting a limited credit spread differential of 5bp-10bp vs. BNP, and slightly more for the curve, put fair value for a 12 year in the context of mid-swaps+170bp. Therefore, a landing price of 180bp implies a 10bp new issue premium. This is at the tight end of recent premiums paid in Tier 2 new issues and for a much bigger size than anyone around. In US dollars we started slightly back from the Société Générale subordinated curve. SG’s 5 17/01//24 was trading in the context of UST+230bp when we opened books for the US dollar 10 year tranche. This is where big US real money accounts delivered indications of interest during the roadshow.

What are your takeaways from the distribution dynamics?

Bélorgey, Crédit Agricole (pictured below): We anticipated, based upon our experience on the AT1 side, that London should be the leading area on the euro tranche. This proved to be true again, alongside significant domestic participation, with 26% of the final placement in France. The US leg, as expected, also demonstrated a high level of granularity. Both tranches found their respective key investors, those who quickly give momentum to the deal and allow for a fast bookbuilding process.

Are you satisfied with the level of granularity and the overall size outcome?

Bélorgey, Crédit Agricole: Yes, very satisfied indeed. It’s a challenging task, satisfying such huge investor demand, which reflects global investors’ views on our credit strength and limited subordinated needs, both in absolute and relative terms. Hence, we chose to increase the size of the transaction.

Our book on the euro deal reached the Eu10bn mark, with more than 450 accounts involved. The US leg showed a $7bn+ book, with almost 300 investors participating. This granularity boded well for the secondary performance of both tranches. As we speak, both tranches have indeed performed in the market after the break, with many investors buying thanks to the very high bid-to-cover we had.

Hoarau, CACIB: Distribution in euros was driven by UK and French real money investors, with the remainder well spread across Europe. There were around 450 accounts in the book at the close, with more than Eu10bn of orders. The US dollar books closed at $7bn, with almost 300 different accounts participating. With a total of 400 orders of Eu10m or less in the combined books, the level of granularity was exceptional. Fifteen key accounts across tranches drove the process. They positioned themselves very early on in the process. When we opened the books for the euro leg, IOIs were already in excess of Eu2.7bn. I don’t remember any deal of this type having such a reception and the size was exceptional given the format.

Were you satisfied with the performance of the bonds off the break?

Hoarau, CACIB: Both the 12 year euro and the 10 year US dollar traded 5bp-10bp tighter off the break. Many real money accounts added in the secondary market and we had high quality two-way flows. So I think we ticked most of the boxes, if not all!

Bélorgey, Crédit Agricole: The performance after the break offered value to investors on both tranches. This has been our goal with our consensual approach since inception.

What were the key takeaways from this transaction?

Hoarau, CACIB: We are in a situation where more and more investors or dealers are ready to pay issuers when lending them money at the front end. Negative yields and excess cash offer a very supportive playground. Consequently, spreads are drifting tighter across the board and there was no advantage in being the first mover, particularly when the Greek situation was losing its relevance. Crédit Agricole funding management therefore proved correct in not rushing into the market but carefully preparing this landmark project. They were the only issuer to announce a roadshow and to dedicate a full week for dialogue with investors. I think it paid off.

How has your dialogue with investors evolved across your sub debt activity?

Bélorgey, Crédit Agricole: Our dialogue with investors is now focused on the most recent development of our Group, the ongoing regulation and its quite high complexity. We are no longer in a situation where investors, especially the US base, are keen to hear about the future of the euro and the Eurozone, the role of the ECB and the political measures taken to reassure market participants. This is behind us. We had almost no questions on the credit per se. The main questions were more focused on the usual topics of the day, but I must say we had a very complete investor presentation that was highly valued by investors, if I can rely on the feedback received during and after this roadshow. Our Financial Communications team did a great job.

As one of the most pro-active banks in terms of capital management, having issued four CRD IV-compliant AT1s since January 2014, how would you describe the development of the Tier 2 market in light of the recent transactions?

Bélorgey, Crédit Agricole: We view it as very resilient, the new transactions being driven by the publication of the TLAC paper. Investors seem to focus on differentiating between issuers and their different total capital profiles and strategies vis-à-vis the TLAC ratio. Recent comparable trades have been done without any deal-related roadshow, but we decided to invest time for our first big benchmark this year in the sub space, using the full-year 2014 results. The investor reaction was great and the roadshow proved extremely efficient in re-emphasising that the Crédit Agricole Group is on track. The Tier 2 market is a good mix in terms of risk-reward profile for investors who are comfortable with a given name. No doubt it will continue to develop on that basis given that, before taking into account any subordination features, a Tier 2 also represents liquidity – in other words, given that quite active Tier 2 issuance in the primary market is also substituting for a portion of senior unsecured funding.

How do you see the Tier 2 market evolving from now?

Bélorgey, Crédit Agricole: As already mentioned, we are anticipating a growing Tier 2 market, a stable to decreasing senior unsecured segment, and still limited growth, if any, on the covered bond side. All this looks sensible considering the recent changes in regulation.

For TLAC-driven reasons, we can’t exclude the arrival of a nascent asset class, junior to senior unsecured and senior to Tier 2 deals, which would support G-SIBs’ efforts when reinforcing their TLAC ratios. You will certainly notice that our Tier 2 notes include an update of the subordination clause in order to carve out a new subordination category between Tier 2 capital instruments and senior unsecured debt. This change will allow for the future use of non-regulatory capital bail-in-able subordinated debt, increasing our flexibility for TLAC/MREL purposes. This is in line with other recent Tier 2 issues, also including French names, whether they are done on a stand-alone basis or via modifications to the issuance programmes.

Do you expect any impact from QE on the subordinated market?

Bélorgey, Crédit Agricole: Yes, we believe QE by the ECB will continue to put pressure on interest rates and credit spread globally in euros. This will support the Tier 2 market and maybe to a lesser extent the AT1 market. As these are the only remaining yielding assets issued by financials in the Eurozone we would expect investors to progressively shift towards these products given spread compression for other products. For us as an issuer, it fits with our funding mix.

Do you think that repeat issuers should adjust their strategy when approaching the market? 

Du Boislouveau, CACIB: Yes, indeed. The most important takeaway from an issuer perspective is to actively seek dialogue with investors. They need to know what kind of offering they can expect from a given name on a given format. This is what Crédit Agricole SA tried to do with this dual-tranche issue.

Can you say anything about your plan in Tier 2 style debt for the rest of the year?

Bélorgey, Crédit Agricole: As stated consistently during the roadshow, this dual-tranche transaction completes Crédit Agricole SA’s Tier 2 needs for 2015 in wholesale benchmark format in major currencies. Based upon our TLAC/MREL calculations, we can anticipate a similar need for 2016, everything being equal. As you know, experience proves that we can’t exclude new parameters coming from the moving regulatory environment or other external factors.