Game on, but pricing rules have changed as investors guard against uncertain world

After a time-out to digest the game-changing German fiscal package, European financial institutions issuance resumed on Monday, with investors still willing to put liquidity to work and enjoy the higher yields on offer, but only too ready to stay on the sidelines if issuers are not prepared to compensate them for the prevailing uncertainty with higher concessions. Neil Day reports.

You can download a pdf version of this article in the full BIHC Briefing alongside further coverage.

The euro primary market for financial institutions proved open for business this week, albeit under revised conditions, as investors demanded higher new issue premiums to reflect uncertainty and volatility as they come to terms with last week’s historic announcements.

News of the planned German fiscal package on top of ReArm Europe, the latest European Central Bank meeting, and ongoing tariff talk saw no unsecured European bank issuance last week, but this week some €7.5bn of supply from senior preferred to Additional Tier 1 alongside an insurance RT1 was absorbed.

However, with market participants still digesting the implications of the newsflow and consequent dislocations, issuers had to accommodate investor concerns by paying higher new issue concessions than for most of the first two months of the year.

Significant attrition and limited oversubscription on Tier 2 issues for Crédit Agricole and Banco Comercial Português (BCP) on Thursday led some market participants to suggest that conditions were becoming fragile, but others said it was merely a question of price, with the key pillars supporting the credit markets remaining in place.

“What has changed is that, more than ever, it’s all about the new issue concession,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “Liquidity is still there and people are still happy to enjoy the carry, which, everything else being equal, is even higher — we gained 30bp on the rate curve last week in a historic daily move on the back of Friedrich Merz’s announcement.

“Investors are being much more diligent, looking for more concessions to secondary curves to get involved, or to stay in order books when pricing is tightened, because they want to be rewarded for the much greater degree of volatility and uncertainty. If you don’t do so, then there is a stronger inclination to stay on the sidelines — the fear of missing out has gone”.

Crédit Agricole SA went out with initial price thoughts of the mid-swaps plus 190bp area for the euro benchmark-sized 10 non-call five Tier 2 issue, expected ratings Baa1/BBB+/A-. After around an hour and 50 minutes, books above €1.25bn were reported, and after around four hours, the spread was set some 25bp inside IPTs at 165bp for an issue size of €750m-€1bn on the back of books above €2.3bn. The deal was later sized at €750m on the back of orders above €930m good at re-offer, meaning it was 1.2 times covered after the 60% fall in the book.

“We lost a quite substantial part of the order book on the last pricing iteration,” said Hoarau at sole bookrunner Crédit Agricole CIB. “This was not a complete surprise, but the magnitude of the loss was greater than anticipated.

“So the oversubscription level was relatively modest, as many investors were demanding a new issue premium higher than the 5bp on offer, but the deal is performing very well in the secondary market, due to the limited size, how we dealt with secondary market trading, and the way in which we allocated the bonds. Ultimately, this was a transaction driven at re-offer exclusively by real money accounts, top quality asset managers and insurance companies out of the UK, Germany and France, with some decent tickets into the Nordics, and some specific central banks.”

He noted that even last month some deals experienced similar attrition amid unquestionably buoyant conditions when hitting their flat to negative new issue premiums. On 10 February, for example, a €1.5bn 10.5 non-call 5.5 ING Groep HoldCo issue and a €1bn 10.25 non-call 5.25 SG Tier 2 deal experienced 56% and 60% drops, respectively, to end 1.1 times and 2.5 times covered.

“It was not a walk in the park,” added Hoarau, “but now that the dust has settled, it was a very solid transaction. We were able to price €750m just 5bp wide of BNP Paribas’ recent trade that was done in better market conditions, securing an excellent result for Crédit Agricole.”

The 165bp re-offer spread is the tightest for a Crédit Agricole Tier 2 issue since March 2019. Being able to achieve such a competitive level was a factor in the French bank proceeding with the opportunistic trade this week, ahead of entering its blackout period until mid-April, by which time it has now completed 50% of its full-year funding programme. Crédit Agricole had already flagged its readiness to complete its programme by mid-year, given the prevailing high level of uncertainty and potential deterioration in conditions. (See Crédit Agricole Assurances RT1 coverage below.)

BCP tightened pricing on its 12 non-call seven Tier 2 issue 10bp, from IPTs of the 225bp area to 215bp, on the back of a peak book of around €900m and final book of around €600m for the €500m deal. The subdued momentum meant that the Portuguese bank paid the highest new issue premium of the week, some 25bp.

While investors’ general renewed diligence regarding new issuance was cited as a factor in the outcome of the BCP trade, factors including the longer maturity and pricing were also seen as stymieing demand. One syndicate banker noted that the spread was just 35bp back of the shorter dated and fully investment grade-rated French national champion trade on the same day was ambitious for the Ba1/BBB- (Moody’s/S&P) Portuguese issue, even if the bank had enjoyed an S&P upgrade from BB+ on Wednesday and secondary levels may have still been squeezed.

Bank spreads had proven resilient in the wake of last week’s economic and geopolitical news, outperforming rates and trading tighter versus Bunds and swaps, aided by the now higher yielding paper proving attractive to real money accounts, and issuers’ ability to tap into this was demonstrated by a €600m perpetual non-call 7.5 Bank of Ireland AT1 as early as Monday. The Irish bank tightened pricing 37.5bp, from IPTs of the 6.5% area to 6.125%, on the back of peak and final books of around €2.4bn and €1.4bn, respectively, to achieve a new issue premium of around 12.5bp.

Standard Chartered meanwhile attracted the strongest demand of the week with an inaugural social senior unsecured issue on Monday, a €1bn eight non-call seven senior non-preferred deal that lost only €100m of orders from its €3bn peak. Pricing was tightened some 25bp, from the 155bp area to 130bp, equivalent to a new issue premium of around 5bp.

“This was exactly what we needed to start the week,” said Hoarau at joint bookrunner Crédit Agricole CIB, “a very solid and consensual trade. It offered scarcity, being a rare euro issue for Standard Chartered, as well as an ESG label.

“The stickiness of demand was remarkable and the issuer went home with the size and price it wanted,” he added, noting that the euro trade offered competitive funding versus US dollars.

Zero attrition for CAA RT1 debut

Crédit Agricole Assurances added insurance to the financial institutions mix on Tuesday by successfully launching an inaugural Restricted Tier 1 (RT1) issue. According to Hoarau at sole bookrunner Crédit Agricole CIB, the issuer drew comfort from Monday’s supply having shown the market to be resilient, while having let reasonable time elapse since Crédit Agricole SA’s last AT1 on 13 February.

Following a mandate announcement on Monday and engagement with over 60 accounts, books were opened with initial price thoughts of the 6.5% area for the euro benchmark-sized perpetual non-call 10.75 year issue, expected rating BBB (S&P). The deal was ultimately priced at 6.25% and sized at €750m on the back of a final book above €2.4bn.

“The issuer decided not to push through the 6.25% mark for its inaugural RT1,” said Hoarau. “Below that level, the book would have been substantially lower in size and quality — IoIs had come in at 6.125%-6.5%, with a key consideration being a pick-up over Crédit Agricole’s latest 5.875% AT1.

“Combined with the size being limited to €750m — versus €1.5bn for the AT1 and €1bn for NN’s RT1 last week — this contributed to there being zero book attrition.”

The new issue premium was put at 12.5bp. NN Group’s 5.75% perpetual non-call 2035 RT1 was quoted at 5.83%, and a €300m Achmea 6.125% perpetual non-call 2035 RT1 issued in January was at 6.05%.

By way of reference, CAA priced with a reset of 359bp, inside the 363.6bp of Crédit Agricole’s recent AT1, and secured a coupon of 6.25% at a time of great uncertainty around the direction of long term interest rates and credit spreads, highlighted Hoarau.

The insurer’s debut comes ahead of the approaching end of the Solvency 2 grandfathering period on 1 January 2026.