Senior non-preferred menu expands quickly in 2017

Despite only having been opened at the tail-end of 2016, the senior-non preferred matured quickly in 2017, as issuers sought to diversify and optimise their use of the new instrument in a variety of maturities, currencies and formats.


After Crédit Agricole had inaugurated the new segment with a EUR1.5bn 10 year senior non-preferred debut on 13 December — followed by Société Générale with a EUR1bn five year the next day — it opened the US dollar market for the instrument with a $2.3bn (EUR2.05bn) three-tranche deal on 3 January alongside BNP Paribas, which debuted with a $2.75bn two-tranche transaction. Crédit Agricole had laid the groundwork for a potential US dollar deal in parallel with the marketing of its euro debut the previous month.

“Our second deal, in January, was denominated in dollars, and there the market appetite proved to be very good as well,” said Olivier Bélorgey, head of the financial management department, Crédit Agricole. “We were able to do a triple-tranche issue, including a floater — and we learned that the range of investors is very broad.”

US dollar-denominated issuance had previously dominated bail-in debt, largely HoldCo issuance, even for European banks, who sold some 70% of their 2016 issuance in dollars, with the euro’s share at 20% and others 10%. But market participants have expected the euro’s share to grow as European investors become increasingly comfortable with the product, a broader range of European names enter the sector, and maturing senior preferred bonds are rolled into senior non-preferred and other bail-in-able instruments.

Santander offered the first twist on France’s senior non-preferred instrument on 26 January, when it sold a EUR1.5bn of five year “second ranking senior” notes on 26 January, anticipating substantial needs and a forthcoming EU-wide instrument (see separate article).

The senior non-preferred sector expanded format-wise into floating rate notes in Spring, as issuers sought not only more diverse but also more cost-efficient sources of SNP funding.

BNP Paribas took the first step away from fixed rate supply when it sold a EUR1.5bn five year FRN on 15 March, with Société Générale the following week issuing a EUR1.25bn five year floater and Crédit Agricole a EUR1bn five year FRN on 11 April.

“This last deal was a little more defensive, being a five year floater, but it was before the French election,” said Bélorgey at Crédit Agricole. “Clearly there was still some euro appetite and we printed the deal at a spread that was still rather interesting — the floater format allowed this — but at that time the appetite from, for example, Anglo-Saxon investors was clearly smaller.

“Actually, the deal shows that even in more difficult market conditions this asset class is able to attract the attention of investors and that deals are possible.”

Société Générale meanwhile broke the US dollar-euro duopoly for senior non-preferred debt as early as 18 January, selling a SEK750m (EUR76.8m) five year trade at 120bp over mid-swaps after uncovering local demand for the new instruments.

Since then French banks have gone on to score firsts for SNP issuance in a variety of other markets: BPCE with a ¥69.6bn (EUR563m) five year in Japanese yen in January; Société Générale with a CHF160m (EUR147m) five year in Swiss francs in February; and BNP Paribas with a A$325m (EUR218m) dual-tranche, fixed and floating five year in Australian dollars in March.

“Obviously US dollars and euros will take the lion’s share,” said Bernard du Boislouveau, FI DCM, Crédit Agricole CIB, “but for issuers keen to raise significant amounts, diversification will play a great part. For benchmarking purposes, the leading markets will remain euros and US dollars, but we will continue to see niche markets offering funding opportunities, not only from an arbitrage angle but also from an investor diversification standpoint.”

TLAC-related debt overall — including senior non-preferred, structurally subordinated debt, etc. — is expected to grow to reach EUR150bn of outstandings by 2019.

“Clearly US dollars and euros will be the dominant currencies — maybe some Scandi currencies and sterling or Swiss francs,” said Olaf Struckmeier, functional head of research, financial regulation, corporate bonds, fixed income, Union Investment Privatfonds.

“I think issuers will use as many currencies as possible, especially those with large buckets to be filled, like BNP Paribas.”