Crédit Agricole: Hitting the Q1 windows

After a defensive start to the year against an unfriendly backdrop, Crédit Agricole moved quickly to hit windows as they appeared when the market turned bullish, and exceeded expectations in the first quarter. Olivier Bélorgey, head of Crédit Agricole SA group funding and chief financial officer, Crédit Agricole CIB, and CACIB DCM and FIG syndicate discussed the group’s strategy.

Ahead of your AT1, did you notice a change in questions from investors as a result of the Santander AT1 non-call event?

Olivier Bélorgey, Crédit Agricole: In fact I only had one opportunity to meet investors in between our AT1 and Santander’s non-call decision, when I was roadshowing in London on 14 February — Santander announced its non-call decision on 12 February, after issuing its new AT1 on 5 February, and we issued our new AT1 on 20 February. So that was only two days after the Santander non-call announcement, and investors were very upset, still trying to analyse Santander’s reasoning.

Since then I have met with investors again, and to be honest their questions have not changed dramatically from the ones we used to hear — the question is almost always the same, namely: what is your AT1 call policy?

Did investor feedback influence your decision to change the non-call period post first call date from one year, as per your last AT1 issuance from 2016, to five years (in line with reset dates)?

Bélorgey, Crédit Agricole: Yes, it did. We try to be investor-friendly whenever possible and when we ask investors what their preference is in this regard, the answer from the clear majority was that the subsequent call be at the next reset, i.e. a five year call period.

We are happy to follow investor appetite on this issue because the call frequency after the first call date is not something we value very much, even if it offers us more options. Why not? Because we are managing the reset spread and interest rate risk and, effectively, we can hedge the interest rate risk. And having a quarterly call can also even potentially be more costly — you have to hedge versus short term rates and this, in effect, increases the reset spread because you have a spread versus short term rates, while your reset coupon remains the same. By having the five year period we simplify the issue somewhat.

Returning to the question you mentioned in your first answer, what can you tell us about your call policy for AT1 instruments?

Bélorgey, Crédit Agricole (pictured below): I cannot say too much about our call policy, since it is restricted by the ECB. However, we can give some indications because the constant question from investors is whether we have a purely economic approach in our call policy. Our answer is, yes, we will have an economic approach. But what is an economic approach? Our economic approach will include at least two elements.

The first is a pure actuarial calculation in terms of reset spread. If we have a reset at 500bp, for example, at what kind of spread can I replace my former issuance? Is it lower? Is it higher? But this is not the only driver in our economic calculation, because if you don’t call an instrument when, let’s say, you can issue at 505bp versus having a reset at 500bp, and because of this decision subsequently investors increase the perpetuity premium they require from you for further AT1 issuances — by, let’s say, 50bp — you destroy value. So in our economic calculation we will take into account, first, a comparison of the spread of a new issuance and the reset spread of the previous issuance, and second, an appreciation of the consequences of a call or non-call on the perpetuity premium that will be requested by investors. It will remain an economic decision, but the economics are not only based on one single driver, i.e. reset spread versus the spread of a new issuance.

How has the AT1 market developed in the first quarter?

Doncho Donchev, DCM solutions, Crédit Agricole CIB: The asset class clearly remained obviously open. Investors are much are more experienced about AT1 and can distinguish between idiosyncratic issuer decisions. They understand the non-call decision is specific to Santander, and Crédit Agricole, ING or whoever else is not penalised in their issuance.

This confirms, in effect, the maturity of the asset class — with perhaps one clarification, that this statement holds true for dedicated AT1 investors; some less experienced investors in the asset class may need to conduct further analysis in order to fully appreciate such facts

Vincent Hoarau, head of FI syndicate, Crédit Agricole CIB: The AT1 market demonstrated a formidable resilience during the purge in the last quarter of 2018 and strongly recovered in the first quarter of this year. Risk assets have rallied, with European bank equity and high beta AT1 having a great run. Performance has been superb and returns for the first three months of the year exceeded 5% in the asset class.

The market successfully passed the Santander non-call test and absorbed deals easily despite limited new issue premiums. Initially, many investors had been concerned that a non-call could have a disruptive impact on AT1 valuations. But, boosted by the positive dynamic overall, reaction was subdued. Investor reaction to this non-call event showed evidence of a market that is becoming mature in its attitude to the management of call schedules on the issuer’s side. European investors now understand that economics come first.

The situation is further supported by technical elements. The outright yield context delivers a powerful support to demand for AT1 product issued by core European issuers. And an important element for the AT1 market is going to be the lack of net issuance. So the combination of firstly, the imbalance in the demand/supply dynamic, and secondly, the historically low yield environment, is a key driver for the asset class.

In terms of due diligence, idiosyncratic risks will continue to be scrutinised and name selection will remain key, but even issuance from second tier names in sub-benchmark format will get done. Looking into the issuance dynamic, globally, issuers have been approaching the refinancing of existing securities very carefully. This is very encouraging for the asset class given the number of calls ahead of us in 2019. So I am very positive about the evolution of the asset class, as long as outright yields continue to collapse and central banks remain dovish.

Crédit Agricole has been very proactive in Q1 in building up the capital stack of the funding plan. What were the drivers in the decision process regarding timing?

Bélorgey, Crédit Agricole: We actually started the year with a covered bond. At the very beginning of January we considered spreads to be very high, clearly distressed, with awful market conditions, and we had the view that spreads would tighten. This was totally different to January 2018, when spreads were very tight and we had the view that the levels would not persist through the year, so we last year began our funding programme with the highest beta instrument we had to issue. This year we started with the lowest beta, issuing covered and preferred senior, and a three year preferred senior at that. But why did we begin issuing at all? When you are a big bank, with a funding programme of EUR17bn, you cannot skip a window completely — it would be a nice idea, but if market conditions do not improve but rather deteriorate, you could find yourself in trouble. So we decided, to be on the safe side, that we couldn’t remain completely on the sidelines.

We could then afford to wait a little bit, being under absolutely no pressure to issue and given our view that spreads would tighten, and so waited until after the publication of our yearly results. After that, knowing that this is a very window-driven market, especially for AT1, we moved very quickly to take advantage of a good window for AT1. We succeeded in taking advantage of the first window we could and achieved an AT1 whose reset spread is the lowest of any AT1 issuance we have made since 2014. We then continued by issuing our senior non-preferred and Tier 2, again considering that we have a certain volume to raise and with market conditions being rather attractive.

Now we have issued 40% of our funding programme and we are much more relaxed. With that much already done, we are in a good position to be able to adapt to market conditions and pick what we want to do over the rest of the year.

You did not execute any deal-related roadshow before those three major trades. Why?

Bélorgey, Crédit Agricole: We conduct regular non-deal roadshows. For example, I was roadshowing in New York in December and in London the week before our AT1 issuance, so there is no need to make a deal-related roadshow. The investor community knows us rather well, but we go over our general strategy, reiterating our capital planning, the construction of our funding plan, and so on. I don’t think that a dedicated deal roadshow for an instrument that we have issued many times, like AT1 or Tier 2, was necessary.

Donchev, CACIB (pictured below): Clearly as a frequent issuer, you do these regular roadshows and all the investor bases are covered, taking in the key regions several times per year, London, the US, Asia, etc. But with the new AT1 a global investor call and net roadshow were also offered, because it was one of the first 144A AT1s after the market disruption of Q4 2018. The presentation of course also outlined the key metrics — capital versus MDA thresholds, loss absorption trigger levels, ADI — all the aspects relevant for AT1 investors. Another key feature that was outlined was the call period after the first call date of five years, which we discussed earlier. And I think most investors were happy with that.

Were you satisfied with the results of the transactions and the make-up of the different order books?

Bélorgey, Crédit Agricole: As I mentioned, with the AT1 we achieved the lowest reset spread in our whole stock of AT1 — also with a new issue concession of between zero and 5bp. If you look at some other issuers and the development of the market, perhaps we could have chosen an even better window, perhaps managing to get a 1/8 better coupon, but that is beside the point — in this market daily volatility can push yields up or down by more than that in a day. Our purpose is not to hit the tightest conditions every time, but to have an effective funding strategy over the course of the year. And if you look at our issuances and the market conditions in Q1, we have successfully ticked many boxes and managed the timing rather well.

Romain Beillard, DCM FIG origination, CACIB: As Olivier said, CASA was not planning to be active in senior non-preferred format at the beginning of the year given the overall spread complex, but tapped the market with lower beta instruments. Right after the AT1, they decided to issue their second 10 year SNP benchmark after their inaugural SNP in December 2016. This transaction priced on a very busy day for FIG supply, with five euro issuances, and almost one year after the issuer’s previous euro SNP transaction. It was an outstanding result due to the scarcity element surrounding the signature and the tenor chosen by the issuer.

On the SNP transaction, the granularity of the book was exceptional: 275 investors participated for a final orderbook above EUR6bn. Almost all the relevant European real money accounts participated in the trade. The bid from asset managers and insurance companies represented 73% of the demand, with close to 20 orders in triple-digit sizes. Exotic official institutions played in decent size, showing the extremely good quality of the placement.

The Tier 2 transaction experienced the same success in terms of reception and quality of distribution. No less than 200 investors participated for a total order volume of around EUR4bn. This transaction was a perfect illustration of the bid for quality Tier 2 paper, which has been tremendous since the beginning of the year.

Hoarau, CACIB: The funding team delivered well above expectations across the bank capital structure. First of all, the 10 year senior non-preferred and 10 year Tier 2 within three weeks are notable achievements. In terms of pricing, the 10 year senior preferred came at mid-swaps plus 120bp, 5bp tighter than where a direct peer had printed a five year two weeks earlier. We also managed to print the Tier 2 only 30bp away from the level at which a peer printed senior non-preferred on the same part of the curve the previous day. The 150bp spread in Tier 2 is a very competitive level, bearing in mind that outright swap levels are at historical lows. On all the transactions, the books were several times oversubscribed with almost zero new issue premiums across formats, and the deals performed immediately when free to trade.

What influenced the maturity structure of the Tier 2, where you chose a bullet structure when one of your peers issued a callable?

Bélorgey, Crédit Agricole: This is an interesting point. We have told investors that we intend to issue more than the 2% of RWA regulatory requirement for Tier 2, because under our capital strategy we are targeting 5%-5.5% of RWAs in Tier 2 and senior non-preferred (with the option of changing our minds if we find that this is not the best strategy) and our intention is to have two layers of more or less the same thickness, meaning that we are targeting around 2.5%-3% of Tier 2. We are doing this because as well as the prudential value of Tier 2, you have the bail-in or liquidation value of it, and whatever the prudential amortisation of a Tier 2, it comes before senior non-preferred in the waterfall. So having a thicker layer of Tier 2 helps you better protect the senior non-preferred layer, which in turn helps you have a better spread for your senior non-preferred (as well as theoretically having helping you have a better spread for your Tier 2 issuance).

Because we will always exceed the 2% requirement, optimising the prudential value of the Tier 2 with a 10 non-call five structure, for example, is not so important for us, maybe not as important as for some of our peers.

Our syndicate desk meanwhile explained to us that the callable structure would cost around 10bp-15bp more than a non-callable structure, and we were not ready to pay 15bp for a call giving us prudential value that we do not value so much, hence our choice of a bullet structure. The market can of course vary and if the callable structure were to be priced without a premium then we would of course choose that, but that was not the case here.

Hoarau, CACIB: With the Fed reversing monetary policy and the ECB getting more dovish throughout the first quarter, bullet structures outperformed callables. From a distribution standpoint, yield hunters tend to favour the bullet format, particularly for highly rated names. Crédit Agricole’s outstanding 2.625% March 2027, the 12 year bullet Tier 2 launched in 2015 that was taken as a key reference, outperformed peers and traded at a very tight level in the secondary market when we approached this new Tier 2 project. The most recent French callable issue, the BNP Paribas 2.375% November 2030 callable in November 2025, was trading in the 175bp context on a yield-to-call basis. Against this spread complex, it was pretty obvious that a 10 year bullet would tick all the boxes and appeal to the greatest range of investors, particularly the big French insurance companies where year-end outright yield prospects were in the process of being revised — in that context, nobody could afford to miss out on the 2% coupon headline on the trade. On a spread basis, this was indeed well inside callable levels.

Can we expect Crédit Agricole to issue callable senior non-preferred soon?

Bélorgey, Crédit Agricole: For the time being, the eligibility for TLAC of a callable structure has not been 100% validated by the European authorities. To be honest, we have no doubt that it will be, but the reason why we have not yet issued it is because it has not been formally validated. We could have considered it for our last issuance, and taken the remote risk of MREL disqualification one year prior to the call date, but, again, the premium for the callable structure was rather high, around 10bp, and it was not worth paying this for, say, an 11 non-call 10 rather than a 10 year bullet. Should the call have been valued at zero, we could have considered it.

Why did you elect to issue Tier 2 and not senior non-preferred?

Bélorgey, Crédit Agricole: We issued the Tier 2 to fully optimise the capital structure.

Given the fact that we still have more Tier 2 than senior non-preferred, we could contemplate only issuing only senior non-preferred for now. However, we want to maintain an investor-friendly approach and even if it’s a bit more costly we think it’s worth providing investors with liquidity on the Tier 2 asset class with some new Tier 2 issuance.

Last but not least, it helps us manage the maturity profile of our Tier 2. If we went too long without issuing any Tier 2, we would potentially have some maturity concentration on our outstanding Tier 2, so that’s something we also try to manage.

All these reasons led us not to opt for only senior non-preferred, but to make at least one benchmark Tier 2 issue this year.