CASA: A window of stability

Amid moving regulatory targets and internal constraints, Crédit Agricole found the right moment to launch a $1.25bn AT1 in January. Here, Crédit Agricole’s Olivier Bélorgey and Crédit Agricole CIB’s Bernard du Boislouveau and Vincent Hoarau, explain how they dealt with the complications of the prevailing market uncertainties.

Neil Day, Bank+Insurance Hybrid Capital: Why did you decide this was a transaction to go ahead with at this point?

Olivier Bélorgey, head of the financial management department, Crédit Agricole: The fundamental rationale was to fulfil the 1.5% Additional Tier 1 (AT1) bucket at Crédit Agricole SA (CASA) level, and now we are done. At the Crédit Agricole group level we will not fill the 1.5% AT1 bucket because at group level we have plenty of Common Equity Tier 1 (CET1) capital in the regional banks, consisting of retained earnings, and as the regional banks have no pressure on ROE this CET1 is in fact cheaper than AT1. At CASA level — the listed company — AT1 is of course cheaper than CET1, so for CASA it is an optimisation of the capital structure.

The rationale for coming to the market in January was then to be as consistent as possible with what we had communicated to the market. We had indicated that we would need roughly Eu1bn of AT1 in 2015 and perhaps Eu1bn more in 2016 — so clearly we were a little late with this AT1 as we didn’t issue last year.

Bernard du Boislouveau, FI DCM, Crédit Agricole CIB: This deal was also the concrete outcome of significant reverse inquiries received at the end of 2015 and reconfirmed in early January 2016. This gave a clear positive signal from leading investors in the AT1 space, supportive enough to move ahead with the project.

Bélorgey, Crédit Agricole: Regarding further AT1 issuance — noting that we had indicated we could issue Eu1bn more — given that AT1 costs are very high and given that we have already filled the 1.5% bucket, we can now say that we will wait and see, in a sense, and only issue more if we have, for example, an increase in our RWAs and consequent increase in our needs.

Day, BIHC: Why did you not do the Eu1bn last year?

Bélorgey, Crédit Agricole: Last year we began with a Eu3bn issuance in the Tier 2 market in March, and we considered that it was not the best idea to issue both Eu3bn of Tier 2 and Eu1bn of AT1 in the same semester. So we waited for the second semester. Then, during the second semester, we actually decided not to issue because of the ongoing discussions concerning the whole SREP process and the Pillar 2 requirements. We considered it would not be fair to issue AT1 without disclosing the results of these discussions to the market. The main question was whether or not Pillar 2 requirements from the ECB would be binding towards MDA. So that’s why we didn’t issue last year.

After that, we decided to issue very quickly this year for a variety of reasons. First of all, because we didn’t issue last year and were therefore a little late in our programme, so we wanted to do it as soon as possible. Also, the communication we made concerning our Pillar 2 requirement in December was well received by the market, so we considered that it was a good timing to proceed.

And also for a technical reason directly linked with Crédit Agricole’s own constraints: this year as we are disclosing a new medium term plan in March, we have a quite long blackout period at the beginning of the year. Indeed, it began on 21 January and we won’t be able to issue before mid-March. So clearly, market permitting, we wanted to issue before the blackout period.

Day, BIHC: You must be very you issued when you did happy that.

Bélorgey, Crédit Agricole: The timing was perfect, I would say, because we seized the opportunity of a very small window in this quite hectic market. We also took that risk — and it was a risk — because we have some experience in the AT1 market, and this experience told us that it was possible to do it.

And to be honest we are happy not only to have issued when the market was better and given what has happened since then; we are also happy because the deal went well — for more than one week after launch, at least, the deal was quoted above par, so the deal was well received by the market. We had more than 200 investors in the book, which is a very high number, especially when market conditions are not so bullish. So clearly we were in line with our approach of being investor-friendly. As one of the biggest issuers — and a quite frequent, too — our dialogue with our investor base is indeed key.

Having said that, we are happy to have issued and anyway, in the current market, you simply cannot issue.

Du Boislouveau, CACIB: The current equity market also shows the volatility we observe in the AT1 space. The ups and downs on a given name, but also across countries and jurisdictions, are amplifying dislocations in the secondary market.

Vincent Hoarau, head of FIG syndicate, CACIB: Olivier is right. The timing was decisive. But we benefited from a high degree of flexibility in terms of timing, simply because we anticipated the January rush and volatility, and proceeded with a global — but non-deal related — roadshow in December. This marketing exercise was instrumental in the success of the transaction. The issuer met roughly 60 investors in seven cities in Europe and in the US within a few days. We then waited for the best possible execution window, ensuring a very quick turnaround and competitive outcome in terms of all-in cost. Ultimately, we caught the best trading days of January for the execution of this strategic trade and collected demand in excess of $4bn for a $1.25bn (Eu1.14bn) sized deal. The approach to timing and pricing was critical to the process given the global sell-off that kicked off the day after pricing.

Bélorgey, Crédit Agricole: Part of the reason is down to the focus on the Deutsche Bank AT1, but that is perhaps just the event that set alarm bells ringing more loudly in investors’ ears — the market is paying more and more attention to MDA and the capacity to pay coupons.

Day, BIHC: What determined your choice of currency?

Bélorgey, Crédit Agricole: Clearly it is investor-driven. As usual, we are rather agnostic regarding euros or dollars. We would prefer euros, because it is our main currency, our accounting currency, but having said that, we clearly try to answer the investor demand, and for that reason we chose US dollars.

Du Boislouveau, CACIB: When it comes to AT1 products, the US dollar market’s depth is indeed much more significant than what we can observe in other markets.

Hoarau, CACIB: As Olivier outlined, the overall project was driven by the profile of demand and global investor appetite for risk across currencies. And the level of liquidity is indeed perceived to be lower in euros. But one should also bear in mind the situation in cross-currency swaps for Eurozone issuers and US dollar AT1 spread levels compared with euros. In that respect, the US dollar market demonstrates greater cost efficiency.

Day, BIHC: Is there anything else you would highlight?

Bélorgey, Crédit Agricole: We didn’t do a deal related roadshow for this transaction — as you mentioned, we have issued many times in AT1 and are rather well known in this market, but we put in place a non-deal roadshow back in December — as outlined previously — in order to get investors’ feelings regarding the latest regulatory developments. Timing-wise, it was just before the release of the Pillar 2 requirement by the ECB and so we were not able to answer all the questions, but it nevertheless gave us the opportunity to test the investors on some scenarios and get a better view concerning their needs. For example, if Pillar 2 requirements are binding or not, what would your reaction be? If it is binding, what kind of buffer above Pillar 2 requirements would you need in order to invest in the AT1 market? And so on.

So we had a very interesting discussion concerning the potential impact of Pillar 2 requirements on the AT1 market, enriched by experience from both sides. That gave us the final touch in terms of how to define our buffer above Pillar 2 requirement, and the message we wanted to give investors once we received the ECB requirements.

Du Boislouveau, CACIB: Over the last year, CASA has created and reinforced a genuine networking and high quality relationship with its investor base. It was particularly obvious during the roadshow back in December given the quality of the exchanges and the mutual search for the best outcome from both issuer and investors’ perspectives.

Hoarau, CACIB: I would like to again emphasize the timing of the transaction and the capacity of the issuer to pull the trigger very rapidly and ensure a quick turnaround in very volatile markets. The context of the reopening of the US dollar AT1 market was fairly complex at the time of launch given the regulatory context and global market backdrop. Poor liquidity in the market kept new issue premiums in the product at fairly high levels, while issuance windows were extremely thin, and almost non-existent for high beta instruments. Any hesitation, and the project would have been postponed sine die. AT1 capitulated and hit unprecedented lows just a few days later. And the market is still closed as we speak.

Day, BIHC: You mentioned your wait and see approach to further AT1 issuance — is there anything else to add regarding what we might see from Crédit Agricole going forward?

Bélorgey, Crédit Agricole: In terms of AT1 needs, everything is now in the market. As I said earlier, any further developments would be linked with other topics, that is to say an increase in RWAs due to Basel IV or other regulatory pressures, or because we would develop part of the business and so on.