France: Droit au but
Crédit Agricole and Société Générale played a key part in the development of the European deeply subordinated and hybrid capital market as it took off this year. Cheaper alternatives may deter AT1 supply from some quarters of the country’s banking sector, but otherwise the stage is set for the French market to fill out. Susanna Rust reports.
The announcement of a fourth AT1 issue in less than a year for Société Générale at the time of writing underscores the point: although the French issuer has only been accompanied by Crédit Agricole so far, French issuers have definitely made their mark on the new hybrid capital market.
Société Générale led the way for the country’s banks when it became only the second European bank to sell new-style, Basel III-compliant loss-absorbing securities when it tapped the US market with a $1.25bn (Eu918m) perpetual non-call five deal in August 2013. Crédit Agricole SA has since then priced a landmark multi-currency transaction, after also making its AT1 debut in dollars and before pricing a rare Tier 2-hosted contingent capital (CoCo) transaction. And, while no other French issuer has been active in the public AT1 market, La Banque Postale structured an internal CoCo in December and has alongside others raised Tier 2 capital.
“French banks have been among the most resilient financial institutions during the crisis, so it was a natural move for them to be at the forefront of the reopening of the hybrid capital market,” says Laurent Adoult, FIG DCM at Crédit Agricole CIB. “They also benefited from the reactivity of the French regulator, which quickly approved the AT1 term-sheet.
“It is fair to expect French banks to continue to issue both AT1 and T2 for the simple reason that they need to refinance old-style Tier 1 and Tier 2 that are gradually phasing out,” he adds, “although the magnitude of supply will probably depend on the evolution of the discussions on the leverage ratio and bail-in requirements, and on market conditions.”
Alain Branchey, senior director at Fitch Ratings, says that French banks are well positioned in terms of their capital levels, tracing this back in part to their experience of the euro-zone sovereign debt crisis.
Alain Branchey, Fitch
“In 2011 there was a bit of a crisis facing French banks and the big four put in deleveraging and restructuring plans to improve their capital and liquidity position,” he says. “Their capital ratios are well above the minimum requirements, including the add-ons for their G-SIFI status.”
He notes a convergence of reasons for French issuers — like banks in other countries, to be selling AT1 securities — but highlights that only two of the country’s largest banks have tapped the new-style hybrid instrument while many more French issuers have been raising Tier 2 capital.
“That obviously doesn’t strengthen Tier 1 capital levels, but it fulfils a lot of goals, like replacing old securities that are being phased out and building buffers for senior debtholders that will be subject to bail-in,” says Branchey.
BPCE, for example, in April sold its fourth subordinated debt benchmark since July 2013, a £750m (Eu938m) 15 year Tier 2 that was priced at 215bp over Gilts and followed a $1.5bn 10.5 year in January, while others took to the euro market for their first subordinated transactions in years.
BPCE has been aiming to further boost its total capital ratio in pursuit of a target ratio in excess of 15% in 2017 at the latest, and hopefully sooner, according to Roland Charbonnel, director, group funding and investor relations at BPCE. He said that guidance was announced to the market in November last year when the new strategic plan of Groupe BPCE for 2014-2017 was presented.
“We are building a total capital ratio buffer to protect our senior unsecured investors from the risk of bail-in,” he said, “and at the same time we are building a buffer to protect our Tier 2 issues from bail-in through our Common Equity Tier 1 (CET1) ratio.”
The issuer is targeting CET1 in excess of 12% by 2017. Raising loss-absorbing capital in the form of AT1 capital is not a top priority for BPCE at the moment since the issuer already exceeds the required level of 3%, said Charbonnel.
“It would become more of a priority if leverage ratio regulatory requirements increase to more than 3% or if there is a market consensus for more than 3%, but at the moment we exceed that level,” he said. “We aren’t ruling out AT1 completely, but the decision has not been made yet and if we did issue the purpose would be first to replace at least part of our old Tier 1 instruments issued a few years ago.”
A Eu1.5bn 2.875% 12 non-call seven issue for BNP Paribas on 13 March was its first Tier 2 deal since 2007, for example. It drew some Eu5bn of orders and was priced at 165bp over mid-swaps. La Banque Postale, meanwhile, on 11 April sold its first public subordinated debt transaction in three-and-a-half years, a Eu750m 2.75% 12 non-call seven Tier 2 that was priced at 152bp over mid-swaps on the back of nearly Eu3bn of orders.
Dominique Heckel, head of long term funding at La Banque Postale, says that the new issue was launched to replace a legacy Tier 2 instrument that begins to amortise in 2015, with the issuer keen to take advantage of favourable market conditions and a strong hunt for yield.
“Investors were quite comfortable with La Banque Postale’s credit and we felt it was a good time to optimise our total capital base,” he says.
In contrast to considerations in play at some other issuers, however, building bail-in buffers to protect senior unsecured creditors was not a driver of the deal.
“Customer deposits are our main source of funding plus, to a smaller extent, covered bonds, so bail-in considerations about the potential increased cost of senior unsecured funding are not as important a factor for us as it is for some other banks,” says Sophie Renaudie, head of capital management at La Banque Postale. “However, we are obviously monitoring regulatory developments about minimum bail-inable debt requirements and will address any issue that arises.”
Banque Postale open to public AT1
The bank is considering further Tier 2 issuance, but an inaugural public AT1 transaction could also be on the cards in the near term, according to officials at the issuer.
“We will look at the market and take advantage of opportunities in the hybrid market because we have identified strong demand for hybrid issues and could consider an AT1 deal in 2015-2016, and maybe this year,” says Heckel.
Renaudie notes that La Banque Postale received very positive feedback on the topic of potential AT1 issuance when it went on a roadshow before its Tier 2 transaction, and says that such a move would be aimed at boosting its leverage ratio and Tier 1 capital base.
Sophie Renaudie, La Banque Postale
The bank has not made any decisions about such a move, but Renaudie says any AT1 from La Banque Postale would probably come with a low trigger, write-down mechanism.
That would contrast with a Eu800m perpetual non-call six AT1 that the issuer structured in December, which features an equity conversion mechanism linked to a high trigger and was entirely subscribed by La Banque Postale’s shareholder, La Poste. That, in combination with a Eu228m capital increase via contributions in kind, helped La Banque Postale increase its prudential equity capital by over 15% in 2013, according to the issuer.
Stéphane Magnan, head of financial markets and ALM, says that the issuer had always intended to work with its parent on the December CoCo, but that this does not prevent it from in the future issuing an AT1 in the public market, and that it is encouraged by how the latter has developed since then.
“It’s a very strong and impressive market,” he says. “If you look at the Crédit Agricole AT1, the structure is quite complicated, but it worked well, so there do not seem to be any questions about French banks being able to issue AT1 instruments.
“At the moment we are looking at all our options but we hope the market will remain the same in the second half of the year.”
Crédit Agricole priced two AT1 transactions this year, a $1.75bn perpetual non-call 10 in January that was its debut in the asset class, and a Eu1.61bn equivalent euro and sterling dual tranche issue in April. The structure was the same for each deal, featuring two triggers — loss absorbency via a temporary write-down upon either a low bank-level or high group-level CET1 trigger being tripped.
A question of priorities
Away from Crédit Agricole, Société Générale and perhaps La Banque Postale, what are the prospects of CoCo supply coming from other corners of the French banking sector?
BNP Paribas has returned to the Tier 2 market, but has yet to make its debut in AT1. One market participant noted that it was one of the first banks to have a fully-loaded Basel III CET1 ratio in excess of 10%, and that this raises questions about its capital needs. As at the end of March the fully-loaded CET1 ratio stood at 10.6%, well above its minimum 9% requirement, and the Tier 1 leverage ratio above 3.7%, well above the 3% 2018 CRD IV threshold, according to the bank.
However, the market participant noted that BNP Paribas is in negotiations with US authorities about a fine for alleged sanction breaches, and that it remains to be seen how this pans out and what the capital implications may be.
Fitch in early May said that BNP Paribas’s capital “remains solid” and that it believes the bank would be able to absorb significant non-recurring items, such as litigation costs, but that any large litigation or regulatory expense would considerably alter the bank’s capital ratios, as is the case for certain peers.
“BNPP has said that the penalties the US authorities could impose on the bank for US dollar payments involving parties subject to US sanctions could far exceed the provision amount booked in 4Q13,” said Fitch.
According to the rating agency, BNP Paribas booked Eu800m relating to the case in the fourth quarter, bringing total litigation reserves to Eu2.7bn.
French co-operative banks, meanwhile, have at their disposal a cheaper way of boosting Tier 1 capital levels than issuing AT1 in the public market, notes Fitch’s Branchey.
“Co-operative shares are often linked to long term debt rates and are a cheap alternative,” he says.
The point is also made by Jean-Pierre Gulessian, head of capital markets at Crédit Mutuel Arkéa, who says that the issuer has no plans at present for AT1 or Tier 2 issuance. This is in part because it has a strong capital base, with a Core Tier 1 ratio of 14.3% as at the end of 2013 and a leverage ratio above 3%, and sees its senior unsecured creditors adequately protected from a bail-in.
“So for the time being we are not in the mood to issue,” he says. “Also, we are a co-operative group so we can raise Core Tier 1 capital by issuing member shares and do so at more favourable conditions than by going to the hybrid bond market.”
When the going is good…
Contrast that with the level of activity from Crédit Agricole and Société Générale. At the time of writing Société Générale had just announced the mandate for a US dollar perpetual NC 5.5 (January 2020 call) AT1, its fourth CoCo in less than a year, and had sold four Tier 2 transactions since 2013.
After a $1bn 10 year Tier 2 issue in January, Vincent Robillard, head of group funding at Société Générale, said that the bank is aiming for a total capital ratio of 14%-15% by the end of 2015 under Basel III rules. He said that Société Générale will continue for the time being to be focused on “classic” Tier 2 and AT1 markets.
Meanwhile, in the space of four months this year Crédit Agricole had already raised Eu2.9bn of a Eu4bn minimum it has disclosed as its AT1 target for 2014-2016, with no need to raise fresh Tier 2 capital.
“The figure we disclosed to the market to reach the targeted capital structure is Eu4bn, but we also indicated that it would be at least this much,” says Olivier Bélorgey, head of the financial management department at Crédit Agricole SA. “Due to the fall in spreads it can be more efficient to accelerate the replacement of old Tier 1 instruments and we don’t want to miss an opportunity to do so if market conditions are good and it is economic for us.
“Given how much we have already raised, the market can clearly anticipate that due to the current market conditions there is a high probability that we will issue more than Eu4bn, and that this will decline if market conditions deteriorate.”
The bank has deliberately not set a target leverage ratio, he adds, instead focusing on target CET1 (14%) and total capital ratios (16.5%) that are driven by an overarching desire to protect its ratings and to access to wholesale funding markets at attractive spreads.
The near term outlook is for the hybrid market to remain a seller’s market, a reversal of the situation in 2013, Bélorgey believes.
“There is a lot of liquidity,” he says. “The Fed is trying to cut back on quantitative easing but is only reducing flows, the ECB is stepping up its actions, and in Japan there is a lot of quantitative easing, so there will remain an excess of demand for 2014 and maybe 2015. After that, I don’t know.”
Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, says that although the French hybrid capital market is still nascent — as is the case generally — the outlook is constructive, in particular as domestic investors open up to the asset class.
“It is getting more mature every day, particularly since the first euro transaction from a French issuer was printed, and more and more French investors are considering opening funds dedicated to this new generation of hybrid instruments,” he says. “This is instrumental for the growth of the market, which needs its own investor base.
“For issuers in France — as in other jurisdictions — the buying power of the UK investor base continues to be decisive because of their huge capacity to buy dollars as well as euros in size.”
For now, he adds, technical factors driving a bull market in hybrid capital are bringing about anomalous situations, such as Banco Santander and BBVA trading very close to Société Générale on a curve-adjusted basis, although the credit spread differential within the French market, i.e. between Crédit Agricole and Société Générale AT1s, makes sense.
After an “extraordinary” spread tightening, consolidation is needed, he suggests.
“A correction would be healthy and natural before compression can resume,” says Hoarau. “The question is when will it happen, what will be the trigger, and — for absolute yields — where the floor will be in the long run.”