Belfius: Stepping into Tier 2

Belgium’s Belfius Bank launched its first Tier 2 transaction on 28 April, a Eu500m 10 year bullet. Here, Ellen Van Steen, head of long term funding at Belfius, explains how the debut fits into and builds on the bank’s improving credit story.

What was the rationale for the Tier 2 transaction?

There were several reasons for Belfius to issue an inaugural Tier 2. The issue will increase our total capital ratio, which is already quite strong at a level of 17.7% phased-in at the end of 2015. A Tier 2 instrument is a logical step in the further establishment of the long term funding strategy of Belfius and, coming after the issuance of covered bonds and senior unsecured benchmarks, allows Belfius to climb up the ladder of juniority. It also contributes towards optimizing the maturity profile of our funding, and towards meeting the expected capital requirements. Finally, it is a further diversification of funding sources and of the investor base.

Why did you choose a 10 year bullet structure?

The feedback from investors clearly showed interest for the 10 year bullet format. We felt we could meet the deepest demand and have the interest of good quality investors with this structure. For an inaugural trade, we wanted all potential investors to be on board. Some investors, like insurance companies, for example, do not always like callable structures.

Since your official roadshow last year, did you carry out some specific marketing in the meantime to prepare this transaction?

We have been meeting investors regularly since the official roadshow of May 2015. In fact, we have had an active investor relations strategy since the rebranding of Belfius Bank. With every yearly or half yearly results, we were able to show the improvement of Belfius and the realization of our objectives. The increasing profitability, the good results of the franchise, the accelerated tactical de-risking, the improvement in the capital ratios, a lower cost/income ratio… these were closely followed and appreciated by investors. We feel there is a continuing and increasing interest in and positive market sentiment towards the Belfius name.

After the release of our excellent 2015 results, we were on the road again meeting investors, and we were happy to notice again the increasing interest, and the positive feedback on a potential Tier 2 benchmark.

What messages about your credit story did you communicate to investors? We note that you were upgraded by Moody’s in January and by Fitch in April.

Our messages concern the main topics of interest of the investors and rating agencies. Profitability, strategy, capital, funding and liquidity, the reduction of the “Side” (legacy) portfolio… are subjects they have been analyzing during the last couple of years. The bank has been evolving positively and constantly since 2012. We feel that we have made intensive communication on the one hand on the improvements — e.g. on the complete separation with the Dexia Group, the tactical de-risking of the Side portfolio and the strong results of the franchise — and on the other hand on our focus on the future, the strategy of Belfius for the coming years: the bancassurance model, the retail strategy, the focus on digital developments, the investments in the Belgian economy based on business and corporate activities and public and social sector.

How did you decide the timing of the trade?

We released our yearly results on 25 February. They were followed by an investor call and investor meetings. We received positive feedback and clear interest for Belfius issues. We also saw this interest in our private placement activity. Investors were spontaneously asking about the timing of our subordinated trade.

In April, the market was receptive to Tier 2 issues, with an important tightening of spreads, strong bookbuilding and secondary market performance.

With secondary spreads at their tightest level for months, and a positive market tone, we felt that we had all the elements in place to benefit from a constructive window to successfully issue our Tier 2 benchmark.

Were you satisfied with the result?

We are very satisfied with our inaugural Tier 2 benchmark — the transaction was a real success. We benefited from fast and fluent bookbuilding, demonstrating the interest in Belfius. Over 115 good quality accounts subscribed to the transaction, resulting in a well diversified and granular book of Eu2.1bn. The spread achieved was mid-swaps plus 255bp, which is very attractive in the current market environment. The bond also performed in the following days in the secondary market.

After the issuance of our Tier 2 benchmark we have seen that since the beginning of May markets have been more volatile, with some pressure on secondary spreads in Tier 2, which confirms that we benefited from good timing by reacting to a positive window.

Looking ahead, do you expect to continue to be active the subordinated segment, Tier 2 or AT1?

Belfius has no intention of issuing AT1 in the coming months, as it benefits from a strong Core Tier 1 ratio. The discussions around subordinated instruments and potential MREL-compliant instruments will be monitored closely. Belfius will further develop its issuing strategy to cover the MREL needs, which are limited.

Belgium has not implemented any modification to senior unsecured status, in contrast to what other European countries have done. What is your view on this topic?

Belfius does not have a HoldCo structure, and issues directly from the bank, which is the operating company. Belfius is analyzing the different solutions on MREL-eligible instruments proposed in Europe, and is considering the potential impact on its situation. For the time being, there is no official decision yet of the Belgian regulator on the preferred route. We consider that the French solution would be practical, straightforward and transparent for investors and issuers.