BPCE, SG welcomed back in Yankee Tier 2s
French banks BPCE and Société Générale were warmly received in the Yankee market when they launched Tier 2 subordinated capital issues on two consecutive days in the middle of January.
BPCE was out first, selling a $1.5bn (Eu1.1bn) 5.15% 10.5 year deal on 13 January, its third Tier 2 since July, with Société Générale pricing a $1bn 5% 10 year issue a day later, only five weeks after it raised $1.75bn of Additional Tier 1 (AT1) hybrid debt in December.
The new issues were part of a busy week for French Yankee supply, with Crédit Agricole launching an inaugural AT1 deal and Banque Fédérative du Crédit Mutuel tapping the senior unsecured market.
SG’s Tier 2 was its fourth subordinated bond issue since 2013, with BPCE also having been active in the bank hybrid market, tapping euros with a Tier 2 last July and then the US market in October.
A funding official at a French bank placed the spurt of French issuance in January partly in the context of the rehabilitation of the country’s banks in the eyes of investors, after they had been hit by the euro-zone sovereign crisis, and added that limited supply of high yielding debt from stable credits plus supportive market conditions also lured issuers into the market. Either needing Tier 2 capital to meet regulatory requirements or seeking to exceed those levels to protect senior unsecured bondholders will have been drivers behind this kind of issuance, he said.
Bernard Delpit, chief financial officer of the Crédit Agricole Group, meanwhile said that a change in the French regulator’s stance on issuance of hybrid capital instruments since 2012 also helps explain the growth of new style subordinated securities. (See CASA AT1 case study for more.)
Officials at BPCE and Société Générale said that their Tier 2 issuance in January goes toward meeting total capital ratio targets as set out in recently communicated guidance to the market.
Société Générale is aiming for a total capital ratio of 14%-15% by the end of 2015 under Basel III rules, said Vincent Robillard, head of group funding at the issuer, and it launched its $1bn 5% 10 year Tier 2 issue on 14 January on the back of its AT1 in December.
“After the success of the AT1 we felt that there would be good appetite from US investors for a Tier 2 and that liquidity was sufficiently high to return to that market, and it was the right decision,” he said.
Leads Bank of America Merrill Lynch, BNP Paribas, Société Générale and Standard Chartered priced the Tier 2 at 225bp over US Treasuries, the tight end of guidance of the 230bp over area. Around 150 accounts placed some $3bn of orders.
Robillard noted that the spread is the tightest for a US dollar Tier 2 issue from a French bank since the collapse of Lehman Brothers, and that it was positive to see other French supply that week also being successful.
He said that in euros Société Générale has only been active on the “classic” Tier 2 market so far, and that it will continue at the moment to be focused on both classic Tier 2 and AT1 markets.
US investors took 76% of Société Générale’s $1bn 5% 10 year Tier 2 bonds, and European accounts 24%. Fund managers were allocated 76%, insurance companies and pension funds 11%, hedge funds 6%, banks 4%, private banks 2%, and others 1%.
BPCE builds bail-in buffers
BPCE priced its $1.5bn 5.15% 10.5 year Tier 2 issue at 235bp over US Treasuries on the back of $6.1bn of demand. The deal followed a euro subordinated Tier 2 transaction in July and a $1.5bn 10 year 5.7% Tier 2 in October.
“It was a great outcome,” said Roland Charbonnel, director, group funding and investor relations at BPCE. “In October we priced our deal at Treasuries plus 300bp over so we were able to tighten the spread quite substantially.”
The reception from North American investors was similarly positive to that for BPCE’s October transaction, he added, with the main difference in terms of the geographic composition of demand being that BPCE was this time able to target Asian investors with its Tier 2 offering.
“Because of the debt ceiling crisis in the US at the time of our October deal we waited until the last minute to go ahead with the deal, and it was too late to be able to market the deal to Asian investors so the distribution there on that occasion was very limited.”
US investors took 68% of BPCE’s latest Tier 2, Europe 21%, Asia 8%, Latin America 2%, and others 1%. Asset managers were allocated 71%, insurance companies and pension funds 12%, hedge funds 10%, private banks 6%, and others 1%.
In tapping the subordinated bank capital market in January, BPCE was aiming to further boost its total capital ratio in pursuit of its target of a ratio in excess of 15% in 2017 at the latest, hopefully sooner, according to Charbonnel.
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.”
The issuer also indicated that the risk-adjusted capital ratio (RAC) of Groupe BPCE that has been calculated by Standard & Poor’s is well above an important threshold, added Charbonnel, and BPCE does not see a need for AT1 issuance from this perspective.