2025 Outlook Investor Roundtable: Cross-currents
After a banner year for sub debt, 2025 may prove to be a year of transition. Liquidity and supply forecasts could support the market, but stretched valuations and macro risks mean investors will have to be more discerning in their selection of names and instruments. Regulatory, LME and insurance developments meanwhile bring new challenges. Bank+Insurance Hybrid Capital and Crédit Agricole CIB invited investors to share their insights on the key dynamics for our latest annual roundtable on 2 December.
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Neil Day, Bank+Insurance Hybrid Capital: André, where do we stand in the FIG market in terms of credit spreads at the turn of the year? What is driving performance?
André Bonnal, Crédit Agricole CIB (pictured): Overall, we’ve had a very strong year for credit in 2024. It has pretty much delivered on the end-2023 consensus. The lower parts of the capital structure have outperformed, with a compression of spreads throughout the capital stack. The main reason credit has been so strong is the liquidity situation and the carry that was on offer. IG credit funds have had pretty much non-stop inflows throughout the year. And in terms of carry, you’ve been getting 3% to 5.5% for single-A, triple-B-type assets that protects you against any kind of mark to market volatility, which is particularly constructive.
Supply has meanwhile been very manageable. Yes, it’s been a record year for capital, but it was exactly what investors wanted to buy, so it’s been very well digested. And if you look at the more liquidity-type funding in euros, covered is down 20% and senior preferred/OpCo 25%, while bail-in debt is up just around 5%. So everything has been perfectly manageable, if not a little bit underwhelming, especially in the second part of the year. We are finishing 2024 5% down year-on-year versus euro supply at the same point last year. That has all been extremely supportive.
On the rates and macro front globally, central banks have delivered on fighting inflation, getting it under control without breaking the economic engine. Some countries have fared better than others, but fundamentally, the macro backdrop has been quite benign and positive for credit.
Where exactly do we stand now? I imagine there’s a difference between how issuers and investors see it, but we are probably almost priced to perfection for issuers. Credit spreads remain at very tight levels in absolute terms — although it may take issuers some time to digest spreads being 20bp or so wider versus September in light of the Bund-swap spread tightening of September, October. On the investor side, versus Bunds we are still pretty much at the tights of the year, so the prospect of further performance is not as strong as where it may have been earlier in the year.
And if you look at risk factors going into 2025, the list is growing. We’ve had a bit of a preview of what the year could present in terms of volatility with the massive decoupling between the US and Europe. The ECB is expected to cut between 1% and 1.5% by June, but the Fed just around 50bp. What impact is that going to have on European banks?
And as we know, the situation in core Europe is particularly bleak from an economic and political standpoint. We are in the midst of a crisis in France and then you get German elections on 23 February. So a lot could go wrong into the beginning of the year — not to mention Trump policies, tariffs and their implications for global growth and inflation in 2025. Eventually here we’re less bullish on credit than we were at the end of 2023.
But overall, it’s important to bear in mind the technicals I mentioned — the liquidity situation, which is still going to be playing out strongly in 2025, and supply, which is not expected to be drastically higher and could potentially even come in a bit lower.
Michael Benyaya, Crédit Agricole CIB: For 2025, we expect similar volumes compared to 2024 overall, but with a change in the mix. We expect AT1 and Tier 2 to be to be down. We’ve just had a super-strong year across AT1 and Tier 2, and part of that was financing of 2025 calls, so volumes will remain elevated, but down compared to 2024. We expect senior preferred and non-preferred to be higher on 2024. Non-preferred will probably be slightly up, but close to flat, because most banks are well positioned in terms of their MREL and TLAC position, and so we have entered the full refinancing cycle for non-preferred and HoldCo. We expect covered bond supply to be slightly up compared to 2024 as we expect loan volumes to resume gradually into 2025.
Raoul Leonard, Sona: The outlook for bank loan volumes and risk weight asset growth is critical to supply. And if everyone is right in being bearish on European economic growth, I struggle to see balance sheets growing.
Jenna Collins, Brevan Howard: But is loan growth expected to be lower or unchanged everywhere? Other than France and maybe Germany, I believe most jurisdictions are expecting a bit of growth, with Spain probably being one of the bigger ones.
Bonnal, Crédit Agricole CIB: Same for Italy. It’s really just core Europe — France and Germany — where, if the overall environment is as stressed as expected, there’s unlikely to be much growth, even if you have the ECB cutting by 1%. That’s why there is probably a little bit more downside to the overall supply outlook than what the forecasts suggest.
Day, BIHC: As André said earlier, the bullish consensus at the beginning of 2024 turned out to be correct. In Crédit Agricole CIB’s latest investor outlook survey, more people are coming down on the bearish side. Jordan, what is your position?
Jordan Skornik, Amundi UK (pictured): I am on the bullish side, at least for the next few months. A lot of negativity is already priced in, but some factors are quite benign. On the supply side, we are indeed not expecting much of an increase. Net supply in 2024 has been relatively low, which is what matters at the end of the day. A lot of deals have already been pre-financed. Of course, in 2025 we’ll have the pre-financing of the following year, but we’re still expecting a very low figure for supply, similar to this year.
We are still seeing quite a lot of demand, a lot of meetings and questions from clients, more than previously. The yields available on these instruments are driving that — if you look at the relative value of a dollar AT1 versus the rest, for example, it’s clear that the yield is the only driver. The inflows we saw this year were quite significant, meanwhile the positioning is quite light, looking at ourselves and our peers. So overall the technical situation looks OK.
There are currently a lot of geopolitical risks — France, Trump tariffs, and so on — but at least for the next three or four months we remain quite bullish on the asset class — also bearing in mind the carry element, which is going to be quite important. Unless you are expecting something really bad, the carry will compensate a lot of the potential short term volatility.
Collins, Brevan Howard: Lately people have been asking how far the compression in spreads can go. And I think we are starting to see where this limit is. In euros, levels are still OK — except, perhaps, for some of the French. Deutsche Bank came at 9%-equivalent in dollars, for example. But in dollars, when Nordea and NatWest came with their AT1s, other five year AT1 were close to 6.5%-6.6%, while the Tier 2s were around 5.8% — spreads down the capital stack are getting so compressed. And you can take it right down to Treasuries — if they are at, say, 4.25%, how tight can JP Morgan, for example, go before you would rather buy a Treasury? I’d say around 5%, so a 75bp differential. Yields are still decent on AT1, so there’s some room for them to rally more, but only if, say, seniors go sub-5% (and Tier 2s under 5.5%). But overall, AT1s aren’t going to go up much more if Treasuries don’t lead the way, so while you can buy them for carry, you won’t really get much capital appreciation. We saw that with Citi’s pref share issue the other day — it came at 6.75% and traded around par. You see it in Asian private wealth — they’re not dumping AT1s, per se, they’re still buying, but less. We’ve also seen second tier names getting close to first tier names, and so there’s little scope for them to go further. Lately when we’ve seen Tier 2s coming close to senior non-preferred for similar credits, you notice that people don’t really want to buy the Tier 2 anymore.
Skornik, Amundi UK: While these AT1 have widened 20bp-30bp in the recent back-up in spreads, you could expect them to widen even further, but they don’t, they’re still trading around par. It shows how important the yield and technical aspects are.
Badis Chibani, Neuberger Berman: AT1s have tightened by around 100bp this year — better than single-B and double-B credit. But it’s still a product to look at for the carry and absolute yield. In a rate-cutting cycle, it’s the best you can get — for the names you’re comfortable with.
Looking at the order books for AT1 in the primary market and Nordea in particular, they were nine times covered — it’s clear how much investors want to buy it, even if the new issue level is low. And there were no new issue premiums on a couple of AT1s this year.
Then if you look at spreads historically and where AT1s are now, they are still not at their tightest levels, even if they have flirted with them. So there are still arguments in favour of the instrument, and even if we do reach the tights, I’m not sure we will stop there.
Collins, Brevan Howard: I think AT1s could tighten in spread. Maybe the reason for the split bullish/bearish vote is that while 2025 might not be the weakest year, it may be a kind of transitional year — better news from some places — banks’ capital and profitability — but we have the sovereign issues. If these sovereign issues recede, that would help. But if they don’t, people may get nervous about some names and stay away from them — although there could be others, such as the UK, that they get comfortable with again.
Leonard, Sona: While we’ve had these big order books for new AT1s since September, the super-tight ones with very low resets have been avoided by the more technical investors, because they’re not as attractive as the AT1 bonds in secondaries of the issuer. We have seen a lot more tourists buying recent new issues. Meanwhile, the street uses these super-tight low reset new issues as shorts. This is quite ironic given we’ve been through a proof of concept in Europe over the last 18 months that nearly every AT1 is called unless it’s under distress. Yet the market is still treating lower resets differently from high resets.
Alloatti, Federated Hermes (pictured): Banks and insurance companies are in good shape — touch wood. Equities are still cheap versus history, and our market is also somewhat driven by the equity market, and we have seen €56bn-equivalent in buybacks.
As has been said, AT1 is a carry product, but unless something unusual plays out — which is not impossible — I wouldn’t expect a lot in terms of capital appreciation. Going back to Jenna’s point, if I had to choose between JP Morgan inside 5% and the Treasury at 4.30%, I’d go with the Treasury, too — also because if there is a liquidity shock driven by tariffs, rates or some other bad news, you should be in the most liquid product, which is the Treasury.
Regarding low resets, I would take the controversial view that the AT1 asset class will haven reached maturity when low coupon bonds are not called and the market just carries on all the same, rather than evoking an end-of-the-world scenario. If a bank or insurance company treasurer has a capital instrument coming up for call at, say, 500bp over and another at 300bp, then it should be their fiduciary duty to call the 500bp one but not the 300bp. It’s not a question of regulatory intervention; just the market perhaps finding an equilibrium over time. (To be clear: this doesn’t mean that I’m short low coupon bonds.)
And then regarding supply, so far there isn’t really an expectation of Basel IV having an impact on capital or loan growth that would justify a positive delta in terms of upcoming supply, and that could potentially be supportive of the market in the coming year, while fund managers will be receiving the cash from calls and LMEs to reinvest.
Leonard, Sona: If we’d had this discussion two weeks ago, in terms of z-spread percentiles versus five year tights, we were getting towards 20th percentile in AT1s in dollars and euros, around 40th in Tier 2 and senior non-preferred, and 50th percentile in senior preferred. But we’ve backed up 20bp across euros and certain dollars, with the French pushing things wider, and spreads now feel more balanced going into January. While we expect lots of supply, you could argue that much of it could go OK — as long as it’s not priced too tightly. So in light of recent spread widening, you could say I feel constructive from here.
That said, there’s clearly a lot of noise. One thing I’m looking at is swap spreads, the widening of the sovereigns. SSA levels, which underpin the market, are making covered bonds a bit awkward. However, everyone seems to dance to their own music in the covered bond world and SSAs, and it doesn’t seem to affect financials people — until it does. There’s definitely going to be some strange pressure between the issuance levels of senior preferred versus covered, if they’re around the same level. If I were a treasurer, I would prefer not to encumber my balance sheet, but rather issue senior preferred to investors who are keen to buy senior preferred — even if it doesn’t actually look great value to me. So I’ll continue to monitor what’s happening to SSAs and covereds, and that’s probably my one concern around new issue pricing.
Alloatti, Federated Hermes: I agree that the SSA widening will potentially translate into our markets. But at the same time, when I ask bank treasuries about these SSA movements, they point out that the new inter-bank market is secured, so issuers are actually doing either self-issued covered bonds with the ECB or pledging the assets, mostly mortgages, with investment banks, for example, and now going out to even three or five years. So there will be less need for them. And if a large European bank were to issue a covered bond at 80bp, I would be very keen to get some on the book. But I suppose they are more likely to issue a senior preferred, at 90bp or even tighter, as opposed to encumbering assets at 80bp.
Collins, Brevan Howard: It’s always a question of when these relative valuations will have an impact, and time and again we’ve seen that it’s when the respective new issues come and they can be compared at around the same time to secondary levels. For example, we haven’t had that much senior preferred lately, which is part of the reason spreads haven’t been impacted yet. I think that when there’s, say, a Santander covered in secondary and a Santander preferred issued, then people will notice.
Bonnal, Crédit Agricole CIB: We got a little bit of that recently when OP did a five year preferred at mid-swaps plus 70bp and a week later Caffil — granted, with the relevant French political uncertainty — did a five year covered at mid-swaps plus 57bp. There will be a lot more of that in January where investors who can easily buy both senior preferred and covered will start to question if it makes sense to buy a very tight senior preferred versus a cheap covered. For the same reason, we’ll probably have issuers not necessarily going into covered if they can do senior preferred at very tight levels and not encumber assets. What they may do is use covered bonds for five to seven year tenors, because we know that long end covered bonds are more difficult and more expensive, and then try to do seven to 10 year senior preferred — also to avoid direct comparisons.
Day, BIHC: France has come up already, and looking at spread compression from a different perspective, with southern Europeans having tightened versus core, what’s next? And to what extent is the political uncertainty in France and Germany exacerbating these dynamics?
Chibani, Neuberger Berman (pictured): This is mainly due to how banks make money in southern Europe versus core Europe: with their variable rates, Italian and Spanish banks have greatly benefitted from the rate hikes, while managing to keep deposit costs low. The French banks have the usury rates law in the country, which limits the increase in mortgage rates, and they also have longer term fixed rate loans. Furthermore, they have been penalised on the liability side, with the regulated savings rates (Livret A) increasing faster than assets and that management can do nothing about. So the Spanish and Italian banks have been performing better on the back of the higher rates. They also face less competition, after the M&A seen in the two countries. In France, there has been no such consolidation, and in Germany, you have maybe more than a thousand banks competing and many of them are not really profitable. So the core and the south are going in different directions.
But indeed, on top of that, you have the political uncertainty. France’s snap election was like the cherry on the cake, with all the volatility it created. I’m slightly bullish on French banks — on their fundamentals — but on French politics, I’m bearish. I think we’ll still be talking about it in six months’ time and we could still see volatility a year on from the snap election in July. So it’s a never-ending game there and I’m not sure what the way out will be.
If you rank the performance of European countries’ sovereign bonds this year in terms of absolute return, the only negative was France, then you have Germany, and the best performing sovereigns were Italy, Spain, Greece and Portugal. And there’s a nexus between the government bond performance and the banks’ bonds in these countries.
Alloatti, Federated Hermes: Yes, you have the different mortgage markets, and also the deposit beta has been much lower in Spain or Italy, which is something that is maybe overlooked.
Then they have enjoyed relative political stability versus, for example, France and Germany. Regarding Germany, they have had a very ineffective government, but a more competent politician could be in place by April, which could resolve the situation in there. Let’s not forget that Germany is one of the few countries that enjoys a degree of the financial flexibility. It also has a very large current account surplus — although it will be interesting to see how that is affected by the change at the White House. The Germans always sort themselves out and there’s no reason why they shouldn’t in 2025.
My wife is French and she has lost hope in France. But nothing has really changed, because we know that in France the solution is always the state. This cannot persist, although, as the joke goes, it will get worse before it gets worse. Maybe at some point in time they will realise that something needs to change. In Italy, the problem was never the Italians, but the political class, whereas in France, there needs to be a change in mentality. The country still a lot of potential. I don’t know if that will take one, two or three years for things to improve, but France is likely remain the sick man of Europe for the next few years.
Chibani, Neuberger Berman: Among German banks, the stress started before the political instability, when the CRE monoliners were hit. Some other CRE-exposed banks were then also hit with a kind of contagion. That’s something you need to bear in mind when looking at countries’ banks, the correlation that exists among them.
Alloatti, Federated Hermes: In the periphery, one of the main cost sources was the non-performing loans, non-performing assets, but that has been repriced down, with the cost of risk being a fraction, in some cases one-third of what it was seven years ago. And of course, this frees up P&L. Meanwhile, especially the retail banking in France and in Germany is more cost-heavy and they are limited in what they can do because they would create social unrest were they were to shut one-third of their branches.
Benyaya, Crédit Agricole CIB: That compression between southern and core Europe has also been seen in the convergence of credit ratings, with many upgrades for banks in Italy, Spain, Portugal and Greece. Now, if you look at across Europe, the rating differential between northern Europe or core Europe and southern Europe is not that big.
Alloatti, Federated Hermes: France could be a catalyst for bouts of underperformance by European financials versus American banks and the rest of the world. But this could create some opportunities, for example if Italian banks widen on the back of French banks widening, as is typically the case, before coming back in.
Skornik, Amundi UK: So far there has been little contagion, whether on BTPs or Italian banks, for example, with OATs and French banks underperforming quite significantly. The questions is whether we will see such contagion at some point.
Collins, Brevan Howard (pictured): To me, France has repriced in a permanent way. It has taken a while for people to understand that — and not everyone has done: we still have dealers saying, France is cheap versus whatever year-to-date. But June 2024 is the new start date. That doesn’t mean it’s a terrible country; it just means it has a new level and we’re not going to go back to where it was before. It is also related to the ratings — although it was quite interesting to see S&P confirm their AA-, at stable, because it looks odd versus Spain, even taking into account France being a much bigger and more diverse economy.
When it comes to Germany, we have to see how much fiscal they want to do, if the debt brake changes. That could also reprice, but German banks already trade relatively cheaply because of their generally lower profitability.
Day, BIHC: We have recently seen large domestic M&A and even cross-border efforts in Europe. Are we finally making progress towards European banking consolidation and unlocking competitiveness?
Chibani, Neuberger Berman: The base case for European banking M&A is a bigger bank buying a smaller one in the same country or in a country it already operates in — so it’s more “A” than “M”. That’s what we’ve seen. There’s been most in Spain — CaixaBank-Bankia,
UniCaja-Liberbank, and the famous BBVA-Sabadell, if it works out.
In Italy a lot of M&A scenarios were discussed: Who is going to buy Monte? How will the third force in Italian banking come about? Then we had last Monday’s surprise news. It’s not surprising that UniCredit would bid for Banco BPM when you consider synergies, market share, etc; it was a surprise because UniCredit was apparently interested in buying Commerzbank.
Even though I want to see cross-border M&A, I am not sure the UCG-Commerzbank deal will work out, because of the political tensions between different countries and the pride of Germans when confronted with the possibility of being acquired by Italians — we’ve seen the negative statements made by the different parties in Germany, the unions and, naturally, Commerzbank itself. Before the BPM announcement, I was nevertheless expecting the Commerzbank deal to go through with a 60% probability; after the announcement, it’s now max 20%. There would be quite a lot of execution risk for UniCredit, because it would be a €800bn bank buying a €570bn bank in Germany and a €200bn bank in Italy, i.e. a bank buying almost the same size. So it’s going to be difficult for them. I don’t know if they can succeed even in Italy, because my understanding is that the government would prefer Banco BPM to buy Monte Paschi.
But net-net, such M&A would be positive for the acquiror and the targets: for the targets, it’s usually better ratings, better spreads, converging with the acquiror; and for the acquiror, it’s a better market share and cost synergies. So both plans have positives.
Given the spread performance that we were discussing earlier, with everything compressed between different countries and different parts of the capital stack, such M&A plays at least still offer an opportunity for interesting trades. We also look at re-rating stories, banks we expect to be upgraded and to trade closer to core names, in senior.
Collins, Brevan Howard: We talk about M&A every year, but I think next year it is particularly likely, because the banks need to do something now that NII is not going up anymore. It’s a story they can tell equity investors. Maybe they held out the prospect of M&A previously, but things were so great that it wasn’t that urgent. Now, they need a new catalyst.
I agree that domestic acquisitions are easier to manage, so maybe that’s going to be the trend. I did have some hope that we might even see that in Germany, because there was talk of Commerz acquiring Hamburg Commercial as a defensive strategy. I don’t know if that was being overly optimistic, because we’ve been waiting on it for such a long time.
Leonard, Sona (pictured): Insurance is also an interesting area in which M&A seems to be breaking out. In that respect, it’s worth bearing in mind the Danish compromise: the loophole that allows a bank to own an insurer, and to then buy an asset manager, and have very low risk weightings across the board.
So there’s just a lot going on. If you’re in the C-suite of any bank or insurer right now, the guy doing M&A is going to be your key guy for growth this year.
I’ve got to say, the UniCredit-Banco BPM deal looks somewhat defensive. It feels like Orcel was trying to stop other deals from happening. Many CEOs haven’t done a deal for many years, so they’re a little bit behind the curve — excluding some of the Spanish banks where emergency M&A has been going on for years. In France, there’s the BPCE-Generali Asset Management tie-up which is actively being discussed. Also, there was the AXA IM deal with BNP acquiring it via its insurance arm, announced in August.
Then there’s eastern Europe. I’m sure there’ll be certain banks trying to scale up there.
Alloatti, Federated Hermes: We always think German and Italy, Germany and France, when we think of cross-border, but eastern Europe is cross-border. With Alpha Bank, UniCredit, for example, got into Romania in a very good deal. Then it’s questionable whether UniCredit-Commerzbank really is cross-border given its largest subsidiary is in Germany — to me, this is a deal to unlock the capital trapped in Munich. Personally, I think they will come back for Commerzbank.
Regarding the Danish compromise, I’d note that the bank’s management needs to demonstrate to the ECB that they actually are integrating the acquisition with respect to liquidity. So it’s not really a free lunch, even if it doesn’t necessarily change how the bank was run. That’s why BNP’s CEO, for example, said very clearly, I want to buy everything without “bank” in the name — and there is the speculation it could look at Ageas, for example, which could be a good fit.
Day, BIHC: What are the expected impacts of the incoming CMDI/general depositor preference?
Benyaya, Crédit Agricole CIB: There are currently various proposals on the table, from the Commission, the Council, and the European Parliament. They all have different views about the layering of deposits. But what is sure is that senior preferred will become more junior in the new liability structure, and junior to all deposits. Depositor preference is almost a given and will be implemented at some point. We can expect an agreement in the course of 2025, and we know that at that point the rating agencies will take actions — they will not wait until the full implementation; they just need to see the final agreement.
In terms of rating impact, most of this will be with Moody’s. For Fitch and S&P, we expect no impact, or a very marginal impact at Fitch in some situations. But at Moody’s, some of the large banks could lose one notch on their long term rating, and also some of them could lose their P1 short term rating, which could be even more problematic, so it’s important not to forget that aspect.
Leonard, Sona: My understanding is that banks can issue more senior preferred to try to support their ratings. My other takeaway is that the senior preferred and senior non-preferred distinction gets blurry.
Collins, Brevan Howard: But they’re not exactly one and the same, though, because senior preferred will be pari passu with derivatives, where senior-non preferred still is not.
Benyaya, Crédit Agricole CIB (pictured): As Raoul said, banks could issue more, but we calculated that banks across Europe would need to issue €150bn more in aggregate to protect their current ratings at Moody’s — that’s quite a lot, it’s not worth it, and we don’t expect that.
Then on the funding mix, as Jenna implied, this will not change, because we expect senior preferred and non-preferred to continue to play specific roles in the liability structure. Senior preferred will remain pari passu with derivatives, so we do not expect to be used for subordinated MREL, which means that senior non-preferred will continue to play a role, used for sub MREL and TLAC.
That’s also why — coming back to the issuance forecast at the beginning — we do not expect CMDI to affect volumes across senior preferred and senior non-preferred. However, my understanding is that some people have a slightly different view.
Skornik, Amundi UK: From my perspective, it will further muddy the waters. When senior non-preferred was introduced, we were sold it as a new asset class, but with the ratings moving closer together, we are going to have two products that are very similar to each other, even if there is the derivatives issue. Is the complication of having the different features still worthwhile? It will probably remain now that it is established.
From a market perspective, although some countries already have this hierarchy, it hasn’t been clear to me there is any pricing differentiation. For example, NatWest’s issuance is different from its peers, but that has never been discounted.
Benyaya, Crédit Agricole CIB: The countries that already have depositor preference will not necessarily be useful precedents, because in those countries it is the sovereign cap that constrains ratings. So I’m not sure that looking at Italian banks will tell you a lot about what could happen for the banks in France, the Benelux, or elsewhere.
Bonnal, Crédit Agricole CIB: So will investors be happy with the 20bp-25bp differential that we have at the moment between senior preferred and non-preferred? Or could it even go to 15bp, 10bp if this goes through and ratings get closer? To me, that feels a bit too close to work.
Collins, Brevan Howard: I think Spain is your guide, because they already have the structure and the ratings probably give you a guide for “new” France.
Bonnal, Crédit Agricole CIB: So we are still talking that 20bp-25bp kind of context, not much of a move.
Alloatti, Federated Hermes: But I think it is inevitable that they will compress, senior pref and senior non-pref. And it should be this way, also because even though they are called senior pref, they are eligible liabilities, so if things go very wrong, they could be impacted as well.
Collins, Brevan Howard: It’s not the same level, though, if it’s pari passu with derivatives, because there would be a difference in desire to trigger derivatives.
Leonard, Sona: I think 8% TLAC gets in the way before you touch senior non-preferred in general, too.
Alloatti, Federated Hermes: But in general, it’s a good thing, because of what happened with SVB. We know some types of deposit are more flighty, and having a level playing field where everyone does the same is better than having to think and dust off the tax code and say, OK, in this country you are preferred, but in this other country you are not.
Benyaya, Crédit Agricole CIB: The countries that already have depositor preference are typically in southern Europe rather than core Europe. However, an exception is Greece, where there is a form of depositor preference, but which is not recognized in the Moody’s LGF model. We could therefore still see an impact for Greek banks, but not in countries like Italy, Portugal or some CEE countries where Moody’s already factors into the analysis the full depositor preference.
Day, BIHC: 2024 was a banner year for subordinated debt, with supply up substantially. Has the market reached an efficient modus operandi with LME and new issues to avoid non-call events? Has investor perception evolved when it comes to call versus non-call?
Skornik, Amundi UK: If someone had in June 2023 asked if all the AT1s would be called in 2024, virtually no one would have said yes. Take the Belfius, for instance: nobody was expecting this bond to ever get called from an economic perspective. And so overall, when you look at what’s coming in 2025, and all the reset structures, who’s expecting anyone not to call? Maybe just RBI or an idiosyncratic name like that.
What they did with these LMEs, the fact that they were done quite far in advance, has been very positive.
However, I would kind of agree with Filippo’s earlier comment, in the sense that there’s always uncertainty over whether something will be considered sufficiently economical or not to be called. I like the US way where it’s quite clear, something is either economical or not, and that’s evident in advance. It’s not like every three years we start to reprice the market because someone says an issuer wants to avoid a call.
But overall, we expect the same behaviour with LMEs next year, which will be quite positive in terms of net supply.
Alloatti, Federated Hermes: There are a few interesting cases coming up next year.
Bonnal, Crédit Agricole CIB: There’s Allianz.
Collins, Brevan Howard: Deutsche Bank.
Leonard, Sona: Definitely, with the FX issue.
Skornik, Amundi UK: There’s the one that they didn’t call in the first place.
Collins, Brevan Howard: So, they might not call it again. But I don’t think it would be a bad move if they didn’t, and I don’t think people would be shocked if that were the case.
Issuers being clearer about how they look at things has helped investors come along for the ride, as we can understand how to look at it, when it’s going to be considered in the money, and when not.
Alloatti, Federated Hermes: Even Santander has moved on from its previous not-so-bondholder-friendly policy.
Benyaya, Crédit Agricole CIB: The regulators gave more flexibility around the use of LMEs, because there is no deduction until you announce to the market.
Leonard, Sona: The situation was ludicrous before, and it was good that they fixed that alongside some other things. The EBA should go further and allow banks to be able to call an AT1 within five years of issuance, subject to regulatory approval — there’s no reason why they shouldn’t.
Skornik, Amundi UK: The LME arrangement is much more welcome than the six month par call.
But whenever the market is pricing bonds very tightly, a new condition that makes me uneasy always appears. Lately it’s the clean-up call. All the recent AT1 deals included clean-up calls at 75% that can ultimately be used to put pressure on investors to participate in LMEs even if they are not that interesting. Most LMEs have been quite OK, but Investec, for example, came a year in advance and at a very high spread, and if they’d had this option to clean up the bonds very easily, it would have put investors in a difficult position. And we had one recently where the issuer tendered the bond at 101.25 but would do the clean-up call at par. Issuers should be careful not to derail this functioning LME activity just because of a few options they get for free.
Chibani, Neuberger Berman: Do you think people will stop buying AT1s if there’s this clean-up call?!
Skornik, Amundi UK: No. No one cares.
Leonard, Sona: They don’t care… until they do.
Alloatti, Federated Hermes: But it’s for the big guys like you to say, no, I’m not in favour.
Skornik, Amundi UK: Clearly I’m not big enough, because I say no, but still…
Collins, Brevan Howard: If it occurs, and it gets in the press, then it will change.
Alloatti, Federated Hermes: To be fair, SEB put it in their presentation. Typically, in the good old days, these kind of things would have been buried in the prospectus, but they put it in a slide.
I agree, it’s annoying, because the idea of the clean-up call in securitisation was 15%, so really just to get rid of a remainder. 70% is not a remainder.
Bonnal, Crédit Agricole CIB: Maybe it will turn out like these three month, six month par calls. A couple of years ago when they were introduced, they seemed like a smart idea, and it’s only really over the past 12-18 months that the topic come to the fore as people have started to wonder if they should be priced to the first call date or the first reset date, given the big gap in valuations. Similarly, the clean-up call is supposed to be a smart idea and at the moment is a free option to issuers, but fast forward three, four years and maybe there will be a question mark over exactly how it works in the context of LMEs.
Day, BIHC: We have seen renewed RT1 supply in 2024. Is the asset class finally on track to achieve more interest from investors?
Benyaya, Crédit Agricole CIB: We have seen an increase in insurance volumes this year, and indeed also an increase in RT1 volumes — which nonetheless remain pretty small in the grand scheme of things. We’re talking new issue volumes for RT1 of around €4bn-€5bn for 2024. That was as anticipated, bearing in mind the end of the Solvency 2 grandfathering period on 1 January 2026.
For 2025, we still expect a good level of activity in insurance DCM, on the back of calls, redemptions, plus the remaining amount of grandfathered Tier 1 to be refinanced. That volume is today around €10bn for EU issuers, so it’s not a lot. And clearly we don’t expect everything to be refinanced in Tier 1, because some insurance companies have the flexibility simply to call with no replacement, or to call and replace with Tier 2. That is fine, and we’ve seen that in the course of 2024. So yes, we expect some renewed RT1 volumes, but we think that the asset class will really remain a niche in the overall FIG DCM market.
Bonnal, Crédit Agricole CIB: It felt like it was only really the Allianz RT1 previously, so it was positive to see a little more, and particularly good for the asset class to have another liquid benchmark from one of the top insurers in the form of Axa’s RT1.
I’ve been hopeful that there could still be a bit more.
Chibani, Neuberger Berman: As Michael said, it has been busier this year, with RT1s €5bn issued out of €22bn of total volumes outstanding. It’s still a very small market if you compare it to AT1s. You won’t have the same liquidity anyway. But the fact that you had some inaugural RT1s, like Groupama, increases interest in the asset class and we will maybe see more demand from investors. But I agree, it’s still a niche market.
Day, BIHC: Is the next test for the asset class upcoming Allianz RT1 calls?
Bonnal, Crédit Agricole CIB: Actually, it kind of feels like this Allianz test is coming a bit too early for an asset class that is just finally getting a little bit more liquidity.
Chibani, Neuberger Berman: It could be a test, given Allianz’s stance vis-à-vis subordinated debt in general. Going back to 2022, they did not call their fixed-for-life Tier 2, they had always said that you have to look at that bond on an economical basis, they then didn’t call it, and the bonds lost 20%. So I think this RT1 with a call date in November next year falls in the same category… So far, it’s okay, it’s in the money, but if between now and November there is more volatility and it’s priced out of the money, I don’t expect them to call it. Which is fair, I think, because for this type of market, RT1s and AT1s, you expect the issuers to make economic calls. The problem is that for one issuer an economic call is maybe 50bp out of the money, and for others it’s 100bp, or maybe 150bp. I would say Allianz is on the more conservative side in comparison to others.
Skornik, Amundi UK: It’s difficult to say, because with the Tier 2 they didn’t call, the gap was huge.
We don’t know what they would define as economical. Is it going to be 5bp or 25bp or 50bp? Probably today, if they were to come to the market in dollars, they would issue at 250bp, maybe 260bp with the recent back-up. The reset on the one callable next year is 300bp, so that should be fine — even if there’s a bit of volatility, they should be able to issue if they want. But the other one with a 210bp reset, if they can issue at 250bp, is it economical? It’s not like there’s 200bp of economic incentive to call and it obviously makes sense to do so. Even with what they have said, if it’s 50bp, they might not call it, wanting to preserve market reputation — which shouldn’t be a factor.