Starting gun fired on TLAC Tier 2 supply

Banks’ efforts to build up Total Loss Absorbing Capital started in earnest in February as they began an anticipated wave of Tier 2 issuance in the wake of the TLAC blueprint released by the Financial Stability Board on 10 November.

In the month from 9 February, when Deutsche Bank kicked off supply, European G-SIBs raised some Eu8.25bn of Tier 2 in euros alone, with further issuance in a variety of other currencies — Crédit Agricole notably including a dollar tranche in a record-breaking dual-tranche Tier 2 benchmark on 9 March.

A surge in Tier 2 supply early this year had been forecast after the FSB launched a consultation on its proposals in November, while in the longer term Standard & Poor’s has estimated total TLAC-eligible assets needs of around Eu500bn by 2019.

“Whilst the banking sector is becoming safer from a fixed income investor’s perspective,” said one investor, “what we will certainly see is a pick-up in supply of the more junior instruments.”

Issuers have equally been weighing the likely impact on spreads of the potential Tier 2 glut. A week before the German bank’s Tier 2 opener, Deutsche Bank’s head of regulatory policy, for example, wrote in a response to the FSB consultation that a maximum of Eu50bn per annum in Tier 2 can be issued in aggregate without impacting spreads, with the amount of an individual issuer being around E3bn-Eu5bn.

Deutsche set the tone for the series of Tier 2s with a Eu1.25bn 10 year bullet that attracted almost Eu4.5bn of demand, allowing pricing to be tightened from initial price thoughts of 225bp over mid-swaps to 210bp over.

“The TLAC race has started and Tier 2 appears to be the instrument of choice,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB in London. “It is a ‘must-pay’ coupon security paying investors a relatively good yield at a time when 10 year senior in core names pays just above 1% and we are seeing negative yields paid in primary on low beta names and formats.

“Tier 2 is being seen as ‘the new senior’,” he added, “and we are seeing more and more done in private placement format, too.”

In the public markets Deutsche was joined in February by France’s BNP Paribas and Société Générale, the former with a Eu1.5bn 10 year bullet that attracted some Eu1.5bn of orders at 170bp over and the latter some Eu3.8bn for a Eu1.25bn 10 year at 190bp over. Spain’s Santander then on 4 March sold a Eu1.5bn 10 year bullet at 190bp over mid-swaps that attracted some Eu8bn of demand.

“The longer issuers waited, the less they paid in this bullish market,” noted a syndicate official.

Belgium’s KBC meanwhile sold a Eu750m 12 year non-call seven issue on the same day as Santander’s deal.

The culmination of the Tier 2 benchmarks was the dual-tranche Crédit Agricole transaction on 9 March, which was split into Eu2bn and $1.5bn pieces that generated Eu10bn and $7bn order books, respectively. The French bank’s strategy was to raise its 2015 Tier 2 needs in one shot (see case study for further details).

Other European issuers ventured further afield to meet their Tier 2 needs, with France’s BPCE following the Netherlands’ Rabobank into the Samurai market. Rabobank had in December sold a ¥50.8bn 10 year bullet, the first Tier 2 Samurai from a European bank, and BPCE on 23 January raised ¥48.3bn across three tranches.

“This Basel III Tier 2 Samurai issue confirms the interest of larger spread paper for a wider investor base, that goes much beyond the usual core-investors,” said a banker at one of BPCE’s leads. “This market still needs to grow, but each transaction will help in that direction.”