Since implementation, Crédit Agricole SA (CASA) has issued five transactions via Origin across senior preferred and senior non-preferred (SNP), including two €1bn-plus syndicated benchmarks.

The platform automates all necessary transaction documentation, including bond and swap term sheets, final terms, subscription agreements, paying agent letters and more. According to CACIB’s legal teams, the tool has reduced the time for drafting and processing documentation by 90%.

Bank+Insurance Hybrid Capital (BIHC): What did your issuance process look like previously? What problems were you trying to solve?

Guillaume Corral, medium and long term funding, London desk, CASA: We have complex bespoke term sheets for each of our asset classes (covered, senior preferred, SNP) and we spend a lot of time pre-trade getting the term sheet right. Our funding strategy involves a mix of benchmarks and private placements, but the private placement flow involves the same number of documents as a benchmark, both pre-and post-trade.

The main hurdles are:

• The significant time and cost of all the documentation that is produced;
• Multiple back and forth between issuer, dealer and their respective counsels;
• The risk of divergence between term sheet and final terms;
• The burden of manually producing the multiple documents, agreements and notices related to each issuance.

BIHC: How long would it take to process a new issuance from start to finish? How did that differ between a private placement and syndicated transaction?

Romain Beillard, director, DCM FIG, Crédit Agricole CIB (CACIB): Depending on the asset class, the new issuance process can be time-consuming, and is still very much manually executed. From the pre-trade to post-trade documents, a number of emails and documents are produced and exchanged.

When we do private placements, we regularly need to produce post-trade documents, such as a subscription agreement, signing and closing agenda, etc. External counsels are appointed in the case of public/syndicated trades, while for private placements our internal counsel will usually draft all post-trade documents, which can take almost a day to expedite.

BIHC: How does the Origin platform solve these problems?

Raja Palaniappan, CEO and co-founder, Origin Markets: Origin’s Documentation tool automates the production of all the necessary documentation that accompanies a bond transaction, including term sheets, final terms, ancillary letters, etc. We can take any document template and make it machine-readable — we then upload it to the platform and the platform creates a dynamic wizard, which guides a user towards populating all the necessary terms.

This documentation engine is overlaid with a bespoke workflow platform that is specifically designed around the debt issuance process. We have different user types (e.g. “DCM”, “dealer legal”, “funding manager”, “issuer legal”, etc), and the workflow tool guides each user in completing the tasks they need to do. DCM can quickly draft a term sheet, the funding manager can approve it and grant a mandate, and the legal teams can pick the trade up and draft final terms — all within minutes.

Source: Origin Markets

BIHC: Are there any limitations to what the platform can do?

Palaniappan, Origin: The platform is built specifically around issuance off programmes (i.e. EMTN/GMTN, etc). This is because the documentation required for that type of issuance lends itself nicely to templating. There is a clear one-to-one relationship between the economic terms in the term sheet and how those terms are represented in the final terms. So for now, standalone issuance is outside the scope of the platform.

Additionally, for now the platform supports interactions between only one dealer and issuer on a transaction. However, over the course of the next few months, we will be releasing functionality to allow multiple counterparties such as other dealers within a syndicate, or even external law firms, to be able to connect and collaborate on a set of docs.

BIHC: How does the issuance process look like now that you are using Origin? How is it better?

Beillard, CACIB: The Origin platform makes the term sheet creation, including BBG TS and the IIIA process, much easier — it now takes us two or three minutes, since the bespoke templates have already been reviewed and validated by all parties.

Once the mandate is granted, there is no unnecessary back and forth emailing between all internal parties (legal teams, capital solutions team when necessary, syndicate) — everything is done faster and is more accurate, while all live modifications can be followed on the platform.

Another important element that could definitely bring value would be to plug internal tools into the Origin platform to avoid multiple entry of the same data.

BIHC: What was the hardest part of getting the product right for CASA/CACIB?

Palaniappan, Origin: The “magic” of the tool — automatically creating documents based on templates — was actually the easy part. What was harder was getting the user experience and workflow right.

Because there are so many participants and stakeholders in each transaction, there are so many different permutations of how a trade could progress, and so many edge cases and exceptions to account for. We spent a lot of time with the teams doing dry-runs and test trades, trying to iron out all the bottlenecks for users as they were working through a transaction. We hold ourselves to a very high bar when it comes to the UX (user experience) of the app — it needs to be incredibly intuitive for each user to know exactly what to do next. If anything, we believe that is one of our strongest USPs, as we have been co-developing the tool with our many dealer and issuer users for quite some time now, so we’re very confident in the flow.

BIHC: What are your ambitions for using the Origin platform in the future?

Corral, CASA: We have already used this for private placements in senior preferred and in benchmark issuances in SNP format. We are considering extending the scope of products that we would run on the platform across the capital structure, including, for instance, covered bonds and subordinated instruments, and also non-euro EMTN issuances.

We would like to be able to use this platform to connect different teams involved in the process of our primary issuances. We expect the use of the platform to save time (allowing for a shorter settlement period, potentially), reduce expenses, decrease operational risk, and increase control over structuring and documentation processes.

BIHC: What is the long term vision for future issuance on the platform?

Palaniappan, Origin: The ultimate benefit of Origin is the ability for us to structure transaction data so that we can automate settlement. We have integrations with many post-trade infrastructure entities already — such as our partners Luxembourg Stock Exchange and Clearstream — and we are building more every day. This allows us to feed transaction data down to their systems in a straight-through process that eliminates the need for lengthy emails and manual steps.

We view Origin as the “application layer” that brings together market participants and helps them originate, negotiate, and create new securities. This application layer sits on top of, and can interface with, whatever “infrastructure layer” participants choose to use. Today it may be the existing CSD (central securities depository) network; tomorrow, it may be on the Ethereum blockchain. Our vision is to ensure Origin is built to bring value to our customers today, while also planning ahead to ensure it continues to bring value to them as the market and infrastructure evolve in the coming years.

Case Study: Origin Documentation facilitates CASA’s inaugural €1bn social bond

Bespoke issuer-defined templates enabled the various parties to streamline the entire documentation process from pre-trade to post-trade

CACIB DCM drafted four pre-trade documents electronically and received the approvals through Origin:

• Indicative bond term sheet
• Indicative BBG Termsheet
• IIIA message
• Final bond term sheet

CACIB legal drafted eight post-trade documents simultaneously through Origin:

• Final terms
• Subscription agreement
• Payment instructions
• Décision d’emission
• Expense Side Letter
• Accounting Letter
• Signing and Closing Agenda
• Certificate of No Material Adverse Change

Source: Origin Markets

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.

Was issuing the first senior non-preferred deal an objective of yours?

Olivier Bélorgey, head of the financial management department, Crédit Agricole: It was not really an objective. However, we felt that we had the strength and the legitimacy to offer investors a new asset class because right now we are among French banks the one with the strongest ratios — in terms of CET1, total capital, and TLAC, with no shortfall anywhere — and rank third among European G-SIBs. We have a total ratio of 19.2%, and if you add in 0.5% for Tier 2 debt that has a remaining maturity below five years and is therefore not taken into account in regulatory ratios but still counts towards TLAC/MREL ratios, it makes 19.7%, which — given the amount of our RWAs — equates to around Eu100bn of protection ahead of this new asset class.

And the corollary of that is that Crédit Agricole’s needs by year-end 2019 are quite small versus its peers. For that reason, setting the benchmark for this new segment ahead of our peers made sense. The market understood clearly that they wouldn’t have to require any kind of premium for strong supply that might have polluted the first reference for this new instrument.

Bernard du Boislouveau, FI DCM, Crédit Agricole CIB: That’s also a reason why a bullet structure was chosen instead of a callable — to offer a pure benchmark that is based on the quality of the balance sheet of the issuer in question and not polluted by external factors like call options, as we have seen in other similar segments. And a 10 year is the best possible benchmark in the euro market to reflect the issuer’s needs, market depth, and also the prestige of this long maturity versus shorter terms.

Bélorgey, Crédit Agricole: Regarding the timing, we had also indicated to the market in March, when discussing our Medium Term Plan, that we had Eu3bn to do per year in senior non-preferred before the end of 2019 but including 2016, because at that time everybody thought that the new French law would be approved more quickly than it was. The market of course fully understood that we had to postpone our plans a little given that the law hadn’t been voted on, but it was a good sign for the market that we try to deliver as soon as we could.

And it was good ALM management to issue before year-end so that we have a little less to do in 2017, because we had indicated to the market that we had Eu6bn to do before the end of 2017. All these figures have to be taken with some caveats due to possible external factors, but under the assumptions behind our Medium Term Plan we now only have Eu4.5bn to do in 2017.

To take a step back, what was the French government’s key aim of introducing this type of instrument, of which we have seen other variants in other countries?

Bélorgey, Crédit Agricole (pictured): I want first to mention that this solution was elaborated by the French banks globally and was the solution presented by the French banks to the French government as their preferred option.

We wanted to find a way to replicate for banks which do not have a holding company (HoldCo) and operating company (OpCo) structure a way to achieve TLAC requirements with a dedicated instrument — this new senior non-preferred is more or less the equivalent of the debt that is issued by the holding company of a bank with a HoldCo/OpCo structure.

Many investors asked us if we will continue to issue senior preferred debt, and so the answer is yes. Our total funding programme at Crédit Agricole SA level for 2016 was Eu14bn, of which we planned to do Eu4bn in hybrid instruments — Eu1bn of AT1 and Eu3bn of senior non-preferred — and although we have not yet disclosed the funding programme for 2017, if you imagine that they will remain in the same area of Eu14bn, then even with Eu4.5bn of senior non-preferred to do, you can clearly see that we still have reasonably large pure funding needs.

This really is an issue for every French bank because due to tax incentives a lot of household savings are going through life insurance companies or regulated savings accounts partially centralised to Caisse des dépôts et consignations (Livret A), and the loan to deposit ratio of French banks is over 100%, around 115%. So French banks still have a need to fund themselves in the wholesale markets even if they have to comply with very high TLAC requirements.

To what extent might this new instrument replace Tier 2?

Bélorgey, Crédit Agricole: It won’t, because in order to optimise the capital structure you have to retain 2% of Tier 2, or you can have perhaps 2.5% — each institution will decide. And if you want this instrument to be really different from Tier 2 in terms of pricing, you have maintain a Tier 2 layer of sufficient thickness.

You announced the deal on the Thursday, then had an intensive marketing period. What were the key messages you were getting across, and how did investors respond?

Bélorgey, Crédit Agricole: The facts demonstrate that investors understood the deal perfectly well because the total size of the book was above Eu5bn, which is quite unusual and very notable for senior debt.

There were questions about why we were issuing at this time, and on top of what I have already said it was because the market is good right now. We are in a windows market, so even if we were clearly just before Christmas, the market remained very bullish and we wanted to take advantage of that.

Investors also wanted us to confirm our needs in terms of bail-in-able debt, while other questions centred on the structure itself: Is it really a bullet? Is it really vanilla? There were a couple of questions on the ratings, too, because rating agencies’ methodologies for this instrument are clearly not at all alike and the outputs are very different: Moody’s rates this new bond Baa2, S&P BBB+, but Fitch A. Even if the rating agencies say that we shouldn’t compare ratings between agencies but with between issuers, it is remarkable to have such a difference. So even if investors are somewhat familiar with the rating agencies’ methodologies, they wanted me to confirm them and comment a little.

Doncho Donchev, capital solutions, DCM, CACIB: This difference in rating methodologies is anyway something already well known among investors. If we take the HoldCo issuance, the same rationale applies. Investors are used to that. Beyond these rating methodologies, investors were fully aware of the advantages for them of investing in this brand new instrument.

Du Boislouveau, CACIB: We also had various questions on the strategy — i.e. are you intending to go for a bullet trade, maturity, choice of currency, size of the contemplated transaction(s), etc — and the needs of Crédit Agricole globally, but no real specific questions from a pure structuring point of view, meaning that these investors were to a certain extent up to speed on this product. And indeed we saw that when we decided to go ahead on Monday the following week.

Bélorgey, Crédit Agricole: In terms of maturity and currency, we have answered that we will fulfil the vast majority of our needs in our two main currencies of issuance, euros and dollars, and that we will favour long-dated instruments. At the end of the day, our total needs for old-style Tier 1, Tier 2 and bail-in-able debt will be around Eu30bn, and if you don’t want to have amortisation concentration, you need to have rather long term instruments, and this means we will issue between five and 15 years for this new instrument.

Given the fact that we will anyway issue in euros and dollars and between five and 15 years, we didn’t have something specific in mind for this first deal, because we will adjust and adapt our maturity profile and relative needs in terms of currencies issue after issue. We were therefore absolutely listening to investors’ needs, indicating that we were fully flexible and that we will issue the deal in the currency and with the maturity fitting the biggest investor interest, and obviously in this instance this was for 10 year euros.

What do you think of the pricing outcome in relation to where senior preferred and Tier 2 are priced?

Bélorgey, Crédit Agricole: The trade came fully in line with our expectations for a first deal. And that was part of the core of my presentation: what rationale do you have to take in order to price this kind of instrument. We think that the first rationale is the capital structure, and the strength of the capital structure, the amount of capital and debt you have to protect this instrument. The second element is the supply and the amount you intend to issue, which can obviously have an impact on the price. For those two elements, we thought that we had some competitive advantage versus our French peers.

A way to consider the valuation of this instrument is to compare the price for bail-in — what kind of spread you have above senior preferred debt — relative to the price for subordination — the spread between Tier 2 and senior preferred. So if you calculate the ratio of the spread of this debt above senior debt, and the spread of Tier 2 above senior debt, you exclude the price of pure funding, pure liquidity, and you have the ratio between bail-in and Tier 2 subordination. And in our case, if you do the maths — and also take into account the fact that for a primary deal you have some need to pay a new issue premium, so work with the fair value of the deal — we issued with a ratio of around 30%.

Vincent Hoarau, head of FI syndicate, CACIB: We are paying 30% of the distance, so it’s a good result. Very few investors had a strong view that this product should price closer to Tier 2 than senior.

Overall, the price sensitivity was very limited and the performance in the secondary market proved we were spot-on, taking into account the size element. The bonds traded three basis points inside re-offer when the market closed for the year.

Michael Benyaya, capital solutions, DCM, CACIB: This new instrument is indeed closer to senior and also logically trades tighter than a HoldCo bond, having no downstream constraint on the use of proceeds. Actually, this new bond category benefits from a clear positioning in the waterfall and investors understood that perfectly.

That all seems very positive. Were there any particularly challenging elements to getting the deal done, apart from waiting for the law to come in?

Bélorgey, Crédit Agricole: Actually that was the biggest challenge. The main other point of discussion was the currency (choosing between US dollars and euros), because we had very strong interest in each, and it was a question of considering where the interest was the strongest. This was not an easy solution considering the very supportive feedback we had on each currency but the deal proves we made a very good choice.

Hoarau, CACIB: We considered all options in terms of maturity and currency, but on Monday everyone was screaming for a euro trade. Being a French bank, it was a little bit more natural to open up the domestic market before doing dollars, though feedback was extremely positive across the board and the pricing difference was marginal. Appetite for the long end was very clear after Draghi gave clarification on what’s going to happen in terms of QE, so the ground was there for a good trade.

Are you anticipating a broader interest in this new funding tool across Europe?

Bélorgey, Crédit Agricole: In its draft of BRRD2 the European Commission requires member states to introduce this new instrument into their national law — also giving some grandfathering for the German solution. At the end of the day, the idea is that across Europe you have effectively two dedicated instruments, one for TLAC and one for funding.

How did we achieve that? I think it’s because the so-called French solution is very simple: a new instrument very clearly positioned in the capital structure from the beginning to the end of the product. It fits an effective requirement. Allows to optimise the cost of the total TLAC requirement. Well, I think that’s why it has been adopted by the Commission. Of course, we had to go and see some other banks in other countries to explain what we have done, but we were very well received by the other banks globally, which had also lobbied towards their own governments to go that route.

Might you market this to retail?

Bélorgey, Crédit Agricole: Potentially yes, we could, but we will be very careful in terms of distribution, because if we do, we have to distribute it in a manner whereby clients will understand very clearly what kind of product they are buying, with no confusion between two instruments that can be called senior — senior preferred and senior non-preferred. So if we distribute it in our network, we will take all the necessary precautions, and perhaps we can also more or less dedicate it to private banking or something like that so that the product is very well understood, without any mis-selling.

Can you say anything further beyond what you indicated earlier in terms of 2017, even if budgets are not yet finalised?

Bélorgey, Crédit Agricole: We said that the funding plan is not yet finalised because of our ongoing budget process, and we do not yet know the needs of our businesses. But it shouldn’t be so different from 2016, in the same region but probably slightly above, at least because we will have to take into account the financing of Pioneer.

What was the rationale for this subordinated transaction?

Grégory Erphelin, CAA: Until 2014 Crédit Agricole Assurance’s funding was totally provided by Crédit Agricole SA (CASA). We then decided to change this policy so that we would have external hybrid funding provided by the market and not only by CASA. This was for two main reasons, notably the new prudential framework of Solvency II, and also changes in Standard & Poor’s rating methodology.

However, the rationale for this particular transaction differs in its objective. It was not to finance the early redemption of intra-group debt, as was the previous hybrid issuance. The notes CAA has just issued are to finance its future growth and also to strengthen its capital position. CAA has many ambitious goals in terms of future commercial growth and has to find a way to finance this. In the current low yield environment, the new solvency framework also forced CAA to go and tap the market.

It is important to understand that CAA’s long term objective remains the same, namely to reduce intra-group funding, but CAA wants to retain the flexibility to issue internal or external debt.

Could you give us an overview of CAA in its market and within the Crédit Agricole Group?

Erphelin, CAA: 100%-owned by Crédit Agricole SA, CAA is a fully-fledged and diversified insurer, operating in savings and retirement, protection, and property and casualty. CAA is a key player in the European insurance market: the eighth largest insurer in Europe and in 2015 CAA became the largest insurance provider in France. CAA is also the largest insurance subsidiary of any of the French banking groups.

CAA’s model is based on a high degree of integration within Crédit Agricole Group, and benefits from the strength of Crédit Agricole Group’s retail banking networks, mainly in France, Italy and Poland. Insurance activities are core businesses for Crédit Agricole Group and its universal customer-focused retail banking model. CAA provided roughly one-third of CASA’s net income in 2015, close to Eu1.2bn (excluding non-recurring items).

And, as disclosed in the Medium Term Plan of the Group, the ambition is to continue developing this successful bancassurance model in the coming years.

What are the key differences between the perpetual subordinated notes issued in 2014 and 2015 and this 32NC12?

Michael Benyaya, DCM solutions, CACIB: The 32NC12 has the same subordination and ranking as the perpetual notes. One of the differences lies in the interest deferral conditions: in this transaction, the mandatory interest deferral condition overrides the dividend pusher mechanism in order to be fully compliant with the Solvency II regulation.

We have also inserted an “Insolvent Insurance Affiliate Winding-up” clause to meet the requirements based on the interpretation of Recital 127 of the Delegated Acts. Finally, the mandatory replacement with equal or better quality capital period in case of a redemption for a gross-up event is applicable for 10 years from the issue date to comply with the ACPR’s guidelines in terms of tax calls.

What drove the choice of a Tier 2-style, 32NC12 issue?

Erphelin, CAA: It is a classic Tier 2 instrument and during the roadshow we got the impression that investors were very familiar with this kind of structure. It is indeed very similar to recent euro dated callable Solvency II Tier 2 securities issued by other European insurance companies.

The 32NC12 maturity structure was driven by our wish to create a curve and to manage our debt profile. We were very open during the roadshow to hear feedback from potential investors, to know if a 31 or a 32 non-call 11 or 12 was better, but it was not a major topic for them, so we chose a 32NC12 to fit with our debt profile.

What were the main topics of discussion on the roadshow?

Erphelin, CAA: We had previously announced that CAA is going to be a regular issuer and CAA came back in 2016 after its two previous trades — one in 2014 and one in 2015. The day we announced the roadshow the feedback from investors and analysts was very encouraging: they wanted more information on CAA, as the name is much better known than it was two years ago.

During the four days we effectively spent “roadshowing”, there were three foremost topics in the discussions. Firstly, it was the capital management under Solvency II, how CAA is managing this new solvency framework. The second point was the level of interest rates, and how can we deal with this new economic situation.

And then, it was about the strategy of CAA within the scope of the Crédit Agricole Group. We took a lot of time to explain the group Medium Term Plan, how CAA is going to increase the diversification of its activities, especially in the protection and property and casualty businesses.

The deal was also launched into a more volatile market than before the summer and in the wake of renewed worries about Deutsche Bank. Were you concerned about market conditions?

Erphelin, CAA: Obviously that was in the background and we were a little concerned about it, but when we decided to proceed with the deal we were quite confident because of the positive feedback we had from investors during the roadshow. We also adopted a consensual approach to pricing, as CASA has done. Taking that into consideration CAA is going to be a regular issuer — it was important to us that the trade performed well in the secondary market.

Bernard du Boislouveau, FI DCM, CACIB: The market was indeed quite shaky, but at the end of the day these kinds of transactions have a certain scarcity value for investors. When you are comfortable with the CA group, with CASA, with CAA, and you know that you have this opportunity to get some extra yield compared to the very low beta transactions we usually see in the financial institutions space, it’s an eye-catching offer.

Within one hour we had more than Eu1.25bn in the order book, which was a sign of very strong momentum, and we were ultimately in a position to price at the tightest end of the range, at 435bp over mid-swaps after initial price thoughts of the 450bp area. So, the Deutsche news was not very supportive globally in terms of spreads, but this particular transaction was frankly just a wonderful success.

You also have to compare this success to what was going on in other markets: with this transaction CAA was to an extent reopening the Tier 2 subordinated insurance market in Europe, while the Asian-targeted US dollar market was drying up.

Erphelin, CAA: Investors brought up the situation in that market during the roadshow and they were very happy with our decision to go to the euro market. It is very important to be aware of such investors’ feedback.

I would add that we wanted to do a benchmark transaction. It could have been Eu750m and we decided to go to Eu1bn thanks to the success of the deal. It’s a very good transaction for CAA.

Du Boislouveau, CACIB: You could even have done Eu1.5bn without any problem. The final book was above the Eu2.5bn mark with 170 investors — we had almost everyone in the global investor community in the book. So it was not only for a success for CAA in terms of pricing and funding strategy — on top of that it’s an excellent refresh in terms of acceptance of the signature among investors.

What are your plans for 2017 onwards?

Erphelin, CAA: We are clearly going to be a regular issuer — there is still intra-group funding provided by CASA in CAA’s book that we need to refinance in the coming years. We also would expect strong growth from the insurance group during the Medium Term Plan. However, we cannot yet say anything more precise on our funding plans.

One of the key takeaways from this deal is that we are going to increase the information we provide to the investor community. It was very useful to go and see investors face to face because they all told to us that they want more information and we will go on non-deal roadshows.

The insurance Tier 3 sector was recently opened in Europe — is this of interest to CAA?

Erphelin, CAA: Tier 3 is an instrument that could interest CAA in the future. Back in September when CAA issued, there was still room for Tier 2 and CAA wanted to issue a classic instrument, so Tier 2 was appropriate. But yes, in the future, CAA could consider looking at this kind of instrument. And why not, maybe in the longer future, look at a Tier 1 transaction?

Neil Day, Bank+Insurance Hybrid Capital: Why did you decide this was a transaction to go ahead with at this point?

Olivier Bélorgey, head of the financial management department, Crédit Agricole: The fundamental rationale was to fulfil the 1.5% Additional Tier 1 (AT1) bucket at Crédit Agricole SA (CASA) level, and now we are done. At the Crédit Agricole group level we will not fill the 1.5% AT1 bucket because at group level we have plenty of Common Equity Tier 1 (CET1) capital in the regional banks, consisting of retained earnings, and as the regional banks have no pressure on ROE this CET1 is in fact cheaper than AT1. At CASA level — the listed company — AT1 is of course cheaper than CET1, so for CASA it is an optimisation of the capital structure.

The rationale for coming to the market in January was then to be as consistent as possible with what we had communicated to the market. We had indicated that we would need roughly Eu1bn of AT1 in 2015 and perhaps Eu1bn more in 2016 — so clearly we were a little late with this AT1 as we didn’t issue last year.

Bernard du Boislouveau, FI DCM, Crédit Agricole CIB: This deal was also the concrete outcome of significant reverse inquiries received at the end of 2015 and reconfirmed in early January 2016. This gave a clear positive signal from leading investors in the AT1 space, supportive enough to move ahead with the project.

Bélorgey, Crédit Agricole: Regarding further AT1 issuance — noting that we had indicated we could issue Eu1bn more — given that AT1 costs are very high and given that we have already filled the 1.5% bucket, we can now say that we will wait and see, in a sense, and only issue more if we have, for example, an increase in our RWAs and consequent increase in our needs.

Day, BIHC: Why did you not do the Eu1bn last year?

Bélorgey, Crédit Agricole: Last year we began with a Eu3bn issuance in the Tier 2 market in March, and we considered that it was not the best idea to issue both Eu3bn of Tier 2 and Eu1bn of AT1 in the same semester. So we waited for the second semester. Then, during the second semester, we actually decided not to issue because of the ongoing discussions concerning the whole SREP process and the Pillar 2 requirements. We considered it would not be fair to issue AT1 without disclosing the results of these discussions to the market. The main question was whether or not Pillar 2 requirements from the ECB would be binding towards MDA. So that’s why we didn’t issue last year.

After that, we decided to issue very quickly this year for a variety of reasons. First of all, because we didn’t issue last year and were therefore a little late in our programme, so we wanted to do it as soon as possible. Also, the communication we made concerning our Pillar 2 requirement in December was well received by the market, so we considered that it was a good timing to proceed.

And also for a technical reason directly linked with Crédit Agricole’s own constraints: this year as we are disclosing a new medium term plan in March, we have a quite long blackout period at the beginning of the year. Indeed, it began on 21 January and we won’t be able to issue before mid-March. So clearly, market permitting, we wanted to issue before the blackout period.

Day, BIHC: You must be very you issued when you did happy that.

Bélorgey, Crédit Agricole: The timing was perfect, I would say, because we seized the opportunity of a very small window in this quite hectic market. We also took that risk — and it was a risk — because we have some experience in the AT1 market, and this experience told us that it was possible to do it.

And to be honest we are happy not only to have issued when the market was better and given what has happened since then; we are also happy because the deal went well — for more than one week after launch, at least, the deal was quoted above par, so the deal was well received by the market. We had more than 200 investors in the book, which is a very high number, especially when market conditions are not so bullish. So clearly we were in line with our approach of being investor-friendly. As one of the biggest issuers — and a quite frequent, too — our dialogue with our investor base is indeed key.

Having said that, we are happy to have issued and anyway, in the current market, you simply cannot issue.

Du Boislouveau, CACIB: The current equity market also shows the volatility we observe in the AT1 space. The ups and downs on a given name, but also across countries and jurisdictions, are amplifying dislocations in the secondary market.

Vincent Hoarau, head of FIG syndicate, CACIB: Olivier is right. The timing was decisive. But we benefited from a high degree of flexibility in terms of timing, simply because we anticipated the January rush and volatility, and proceeded with a global — but non-deal related — roadshow in December. This marketing exercise was instrumental in the success of the transaction. The issuer met roughly 60 investors in seven cities in Europe and in the US within a few days. We then waited for the best possible execution window, ensuring a very quick turnaround and competitive outcome in terms of all-in cost. Ultimately, we caught the best trading days of January for the execution of this strategic trade and collected demand in excess of $4bn for a $1.25bn (Eu1.14bn) sized deal. The approach to timing and pricing was critical to the process given the global sell-off that kicked off the day after pricing.

Bélorgey, Crédit Agricole: Part of the reason is down to the focus on the Deutsche Bank AT1, but that is perhaps just the event that set alarm bells ringing more loudly in investors’ ears — the market is paying more and more attention to MDA and the capacity to pay coupons.

Day, BIHC: What determined your choice of currency?

Bélorgey, Crédit Agricole: Clearly it is investor-driven. As usual, we are rather agnostic regarding euros or dollars. We would prefer euros, because it is our main currency, our accounting currency, but having said that, we clearly try to answer the investor demand, and for that reason we chose US dollars.

Du Boislouveau, CACIB: When it comes to AT1 products, the US dollar market’s depth is indeed much more significant than what we can observe in other markets.

Hoarau, CACIB: As Olivier outlined, the overall project was driven by the profile of demand and global investor appetite for risk across currencies. And the level of liquidity is indeed perceived to be lower in euros. But one should also bear in mind the situation in cross-currency swaps for Eurozone issuers and US dollar AT1 spread levels compared with euros. In that respect, the US dollar market demonstrates greater cost efficiency.

Day, BIHC: Is there anything else you would highlight?

Bélorgey, Crédit Agricole: We didn’t do a deal related roadshow for this transaction — as you mentioned, we have issued many times in AT1 and are rather well known in this market, but we put in place a non-deal roadshow back in December — as outlined previously — in order to get investors’ feelings regarding the latest regulatory developments. Timing-wise, it was just before the release of the Pillar 2 requirement by the ECB and so we were not able to answer all the questions, but it nevertheless gave us the opportunity to test the investors on some scenarios and get a better view concerning their needs. For example, if Pillar 2 requirements are binding or not, what would your reaction be? If it is binding, what kind of buffer above Pillar 2 requirements would you need in order to invest in the AT1 market? And so on.

So we had a very interesting discussion concerning the potential impact of Pillar 2 requirements on the AT1 market, enriched by experience from both sides. That gave us the final touch in terms of how to define our buffer above Pillar 2 requirement, and the message we wanted to give investors once we received the ECB requirements.

Du Boislouveau, CACIB: Over the last year, CASA has created and reinforced a genuine networking and high quality relationship with its investor base. It was particularly obvious during the roadshow back in December given the quality of the exchanges and the mutual search for the best outcome from both issuer and investors’ perspectives.

Hoarau, CACIB: I would like to again emphasize the timing of the transaction and the capacity of the issuer to pull the trigger very rapidly and ensure a quick turnaround in very volatile markets. The context of the reopening of the US dollar AT1 market was fairly complex at the time of launch given the regulatory context and global market backdrop. Poor liquidity in the market kept new issue premiums in the product at fairly high levels, while issuance windows were extremely thin, and almost non-existent for high beta instruments. Any hesitation, and the project would have been postponed sine die. AT1 capitulated and hit unprecedented lows just a few days later. And the market is still closed as we speak.

Day, BIHC: You mentioned your wait and see approach to further AT1 issuance — is there anything else to add regarding what we might see from Crédit Agricole going forward?

Bélorgey, Crédit Agricole: In terms of AT1 needs, everything is now in the market. As I said earlier, any further developments would be linked with other topics, that is to say an increase in RWAs due to Basel IV or other regulatory pressures, or because we would develop part of the business and so on.

This is your first Tier 2 transaction since October 2010. What drove your choice of tenor and currency, and notably the dual currency format?

Olivier Bélorgey, Crédit Agricole: Before going into the specifics of this transaction, let’s concentrate first on the rationale for the deal and get the full picture from our perspective as an issuer: it is fair to say that Crédit Agricole SA benefits from a good relative positioning versus its peers, thanks to the consistent strategy implemented over recent years, putting the Crédit Agricole Group back on track after a more difficult period, when the Group had to redefine its strategy. This period is behind us and we have had the opportunity to gauge the strong market sentiment toward our signature thanks to regular roadshows and the successful transactions we have executed over the last 18 months. Our marketing of the trade during the week of 2 March, following the publication of our 2014 results in February, further reinforced this positive perception.

If we can now elaborate more on the actual Tier 2 decision, our wish at Crédit Agricole SA level is to reach the 8% level for the MREL ratio by end-2016 and a minimum TLAC ratio of 19.5% (subject to changes in RWA calculation methodology) including buffers by 2019 whilst excluding senior unsecured debt. Why do we have these objectives? This is because we need to protect our market access, considering that, due to the French “bancassurance” model (i.e. French banks typically incorporate insurance operations in their business), our loan-to-deposit ratio is structurally above 100%, with life insurance contracts being a pivotal form of saving for French customers. Under these circumstances, ensuring open access to wholesale funding is thus something we need to protect.

Turning to market considerations, it’s clear that many G-SIBs will be keen to enter the Tier 2 market, and for significant amounts, if our assumptions are correct. For that reason, why wait when the market trend is positive and investor appetite confirmed? But – and this is very important for our funding strategy – we want to have a clear dialogue with our investor base: we want to communicate transparently our needs, i.e. Eu3bn in each of 2015 and 2016, and, markets permitting, we were keen to raise the entire Eu3bn yearly size in one transaction in order to bring predictability and an offering consistent with our needs. As an add-on, and to differentiate Crédit Agricole Group, it’s fair to say that the global needs for Tier 2 issuance from major banks are not always clearly stated. Presenting this transaction as a unique opportunity for investors to participate in a Tier 2 issue of Crédit Agricole Group, after an absence under this format of some four years, brings clarity to the funding strategy and the way this strategy is perceived. The idea is to not come back with another Tier 2 issue in benchmark format in euros or US dollars in 2015. The success of this trade fully vindicated our strategy.

Vincent Hoarau, CACIB: We felt the market would be receptive to a jumbo transaction. The liquidity situation is extraordinary and the start of QE by the ECB offers huge traction to any type of transaction in the primary market. The impact of the ECB stimulus is spilling over into all asset classes, including subordinated debt. The performance of other recent euro Tier 2 benchmarks also paved the way for landmark execution combining euro and US dollar offerings to maximise size, without damaging the secondary market performance.

It was clear from the outset that our approach to pricing had to be consensual. Crédit Agricole SA was also very transparent with investors during the roadshow on subjects such as capital planning and MREL/TLAC projections. A combined target size of Eu3bn equivalent had even been openly communicated to investors met in France, Germany, the UK, New York and Boston. The issuer did not want to surprise anyone and was aware that the size element can be decisive in the subordinated market. The 10 year bullet structure in US dollars was practically fixed at the beginning of the roadshow since this is a pretty obvious tenor for the US investor base. That left a 12NC7 or 12 year bullet structure for the euro leg. We even considered a 15 year bullet. 10NC5 is not a relevant structure with regards to TLAC regulation given the start of TLAC application in 2019. By the end of the roadshow we received confirmation from euro investors that 12 year euros and 10 year US dollars was the combination of choice.

Wasn’t launch a little challenging given the execution risks across two tranches? What did you take into account when planning global execution across various time zones and investor bases?

Bélorgey, Crédit Agricole: Market conditions were globally supportive across markets. On top of this, US dollar investors have a positive view of Europe. As I said, we chose to have a clear, unambiguous communication with investors following our 2014 results on potential TLAC/MREL needs, explaining clearly the deal rationale.

We know, thanks to our experience in the subordinated market – and please refer to the four AT1 transactions we did during 2014 – that top investors can take multi-currency exposure on a given name, hence the strategy of offering the euro first, then opening the US dollar tranche at the US market opening, to ensure investors have a real-time view of their global exposure across tranches.

Benchmarking the euro first was also a way of sending a strong signal to the US investor base, taking into account the strong performance both in terms of relative pricing and investor reach.

Combining a euro and a dollar was also in line with our wish of targeting the most liquid markets, where the Group also has natural RWAs and where we have already benchmarked the name in subordinated format via the 2014 AT1 offerings. We are proud to say that Crédit Agricole SA as an issuer is now benefitting, deal after deal, from one of the strongest footprints in the market. But, again, this is no miracle. This comes from the time invested during all our past roadshows. Investors do value this. I should also add that Crédit Agricole at Group level has the second strongest Tier 1 ratio amongst the European G-SIBs. Again, no miracles here, just the return on investment of a successful balance sheet restructuring.

Bernard du Boislouveau, CACIB: We considered execution over two days, but when the market showed evidence of a softer tone on Monday we decided to pull the trigger immediately, feeling that the correction could last more than a day after the very good sessions enjoyed the previous week. We also knew that demand out of Asia would be limited, so having books open overnight was not a sensible option. Risk of arbitrage and cannibalisation was extremely limited given the differentiation in tenors and the strong appetite of investors across the board for the signature in Tier 2 format and across currencies.

What was the pricing rationale?

Hoarau, CACIB: The recent BNP 2.375% 17/02/25 10 year bullet Tier 2 opened at i+150bp bid on the morning of execution, while Crédit Agricole SA does not have any recent Tier 2 deals outstanding. Its last benchmark was launched in October 2010, so in any case was not a relevant comparable. Discounting a limited credit spread differential of 5bp-10bp vs. BNP, and slightly more for the curve, put fair value for a 12 year in the context of mid-swaps+170bp. Therefore, a landing price of 180bp implies a 10bp new issue premium. This is at the tight end of recent premiums paid in Tier 2 new issues and for a much bigger size than anyone around. In US dollars we started slightly back from the Société Générale subordinated curve. SG’s 5 17/01//24 was trading in the context of UST+230bp when we opened books for the US dollar 10 year tranche. This is where big US real money accounts delivered indications of interest during the roadshow.

What are your takeaways from the distribution dynamics?

Bélorgey, Crédit Agricole (pictured below): We anticipated, based upon our experience on the AT1 side, that London should be the leading area on the euro tranche. This proved to be true again, alongside significant domestic participation, with 26% of the final placement in France. The US leg, as expected, also demonstrated a high level of granularity. Both tranches found their respective key investors, those who quickly give momentum to the deal and allow for a fast bookbuilding process.

Are you satisfied with the level of granularity and the overall size outcome?

Bélorgey, Crédit Agricole: Yes, very satisfied indeed. It’s a challenging task, satisfying such huge investor demand, which reflects global investors’ views on our credit strength and limited subordinated needs, both in absolute and relative terms. Hence, we chose to increase the size of the transaction.

Our book on the euro deal reached the Eu10bn mark, with more than 450 accounts involved. The US leg showed a $7bn+ book, with almost 300 investors participating. This granularity boded well for the secondary performance of both tranches. As we speak, both tranches have indeed performed in the market after the break, with many investors buying thanks to the very high bid-to-cover we had.

Hoarau, CACIB: Distribution in euros was driven by UK and French real money investors, with the remainder well spread across Europe. There were around 450 accounts in the book at the close, with more than Eu10bn of orders. The US dollar books closed at $7bn, with almost 300 different accounts participating. With a total of 400 orders of Eu10m or less in the combined books, the level of granularity was exceptional. Fifteen key accounts across tranches drove the process. They positioned themselves very early on in the process. When we opened the books for the euro leg, IOIs were already in excess of Eu2.7bn. I don’t remember any deal of this type having such a reception and the size was exceptional given the format.

Were you satisfied with the performance of the bonds off the break?

Hoarau, CACIB: Both the 12 year euro and the 10 year US dollar traded 5bp-10bp tighter off the break. Many real money accounts added in the secondary market and we had high quality two-way flows. So I think we ticked most of the boxes, if not all!

Bélorgey, Crédit Agricole: The performance after the break offered value to investors on both tranches. This has been our goal with our consensual approach since inception.

What were the key takeaways from this transaction?

Hoarau, CACIB: We are in a situation where more and more investors or dealers are ready to pay issuers when lending them money at the front end. Negative yields and excess cash offer a very supportive playground. Consequently, spreads are drifting tighter across the board and there was no advantage in being the first mover, particularly when the Greek situation was losing its relevance. Crédit Agricole funding management therefore proved correct in not rushing into the market but carefully preparing this landmark project. They were the only issuer to announce a roadshow and to dedicate a full week for dialogue with investors. I think it paid off.

How has your dialogue with investors evolved across your sub debt activity?

Bélorgey, Crédit Agricole: Our dialogue with investors is now focused on the most recent development of our Group, the ongoing regulation and its quite high complexity. We are no longer in a situation where investors, especially the US base, are keen to hear about the future of the euro and the Eurozone, the role of the ECB and the political measures taken to reassure market participants. This is behind us. We had almost no questions on the credit per se. The main questions were more focused on the usual topics of the day, but I must say we had a very complete investor presentation that was highly valued by investors, if I can rely on the feedback received during and after this roadshow. Our Financial Communications team did a great job.

As one of the most pro-active banks in terms of capital management, having issued four CRD IV-compliant AT1s since January 2014, how would you describe the development of the Tier 2 market in light of the recent transactions?

Bélorgey, Crédit Agricole: We view it as very resilient, the new transactions being driven by the publication of the TLAC paper. Investors seem to focus on differentiating between issuers and their different total capital profiles and strategies vis-à-vis the TLAC ratio. Recent comparable trades have been done without any deal-related roadshow, but we decided to invest time for our first big benchmark this year in the sub space, using the full-year 2014 results. The investor reaction was great and the roadshow proved extremely efficient in re-emphasising that the Crédit Agricole Group is on track. The Tier 2 market is a good mix in terms of risk-reward profile for investors who are comfortable with a given name. No doubt it will continue to develop on that basis given that, before taking into account any subordination features, a Tier 2 also represents liquidity – in other words, given that quite active Tier 2 issuance in the primary market is also substituting for a portion of senior unsecured funding.

How do you see the Tier 2 market evolving from now?

Bélorgey, Crédit Agricole: As already mentioned, we are anticipating a growing Tier 2 market, a stable to decreasing senior unsecured segment, and still limited growth, if any, on the covered bond side. All this looks sensible considering the recent changes in regulation.

For TLAC-driven reasons, we can’t exclude the arrival of a nascent asset class, junior to senior unsecured and senior to Tier 2 deals, which would support G-SIBs’ efforts when reinforcing their TLAC ratios. You will certainly notice that our Tier 2 notes include an update of the subordination clause in order to carve out a new subordination category between Tier 2 capital instruments and senior unsecured debt. This change will allow for the future use of non-regulatory capital bail-in-able subordinated debt, increasing our flexibility for TLAC/MREL purposes. This is in line with other recent Tier 2 issues, also including French names, whether they are done on a stand-alone basis or via modifications to the issuance programmes.

Do you expect any impact from QE on the subordinated market?

Bélorgey, Crédit Agricole: Yes, we believe QE by the ECB will continue to put pressure on interest rates and credit spread globally in euros. This will support the Tier 2 market and maybe to a lesser extent the AT1 market. As these are the only remaining yielding assets issued by financials in the Eurozone we would expect investors to progressively shift towards these products given spread compression for other products. For us as an issuer, it fits with our funding mix.

Do you think that repeat issuers should adjust their strategy when approaching the market? 

Du Boislouveau, CACIB: Yes, indeed. The most important takeaway from an issuer perspective is to actively seek dialogue with investors. They need to know what kind of offering they can expect from a given name on a given format. This is what Crédit Agricole SA tried to do with this dual-tranche issue.

Can you say anything about your plan in Tier 2 style debt for the rest of the year?

Bélorgey, Crédit Agricole: As stated consistently during the roadshow, this dual-tranche transaction completes Crédit Agricole SA’s Tier 2 needs for 2015 in wholesale benchmark format in major currencies. Based upon our TLAC/MREL calculations, we can anticipate a similar need for 2016, everything being equal. As you know, experience proves that we can’t exclude new parameters coming from the moving regulatory environment or other external factors.

Neil Day, Bank+Insurance Hybrid Capital: This was your fifth contingent capital trade since you launched your inaugural Tier 2 hosted CoCo in September 2013. What is the rationale behind this latest AT1 transaction?

Olivier Bélorgey, Crédit Agricole (pictured above): The rationale is totally in line with our previous issues. That is: firstly, we want to strengthen the capital structure of the group in order to protect our rating and to comply with the expectations of the market concerning our capital structure. We have therefore reused exactly the same structure that we conceived in January and already reused in April, which is a dual trigger instrument with one trigger, the low trigger, at Crédit Agricole SA (CASA) level — which is the issuing entity of this instrument, and hence the trigger is a regulatory one — and we have added a high trigger, at group level — which is our own decision, because when we explain the strength and the capital structure of Crédit Agricole, we always refer to the group, so we also wanted this instrument to be linked to the group level.

Plus, more specifically for this issuance: it is part of the capital roadmap we disclosed to the market in our medium term plan, but we perhaps issued a little more quickly than we anticipated because of a methodological change by Standard & Poor’s regarding their evaluation of a hybrid instrument issued by our insurance company subsidiary. Since May these instruments are now, in the RAC calculation, deducted from our core equity Tier 1, whereas they were previously deducted from Tier 1 or Tier 2. This methodological change had an impact of 40bp on our RAC ratio, and even if we remain above the 7% threshold — which is very important for S&P in terms of RAC ratio — we had less room for manoeuvre, and we wanted to restore this room. That’s why we issued a little more quickly than the market, perhaps, and we, anyhow, anticipated in April.

Bernard du Boislouveau, Crédit Agricole CIB: We can also say, Olivier, that the timing of the issue was linked with the fact that the market is in a quite good shape, no?

Bélorgey, Crédit Agricole: Yes. Finally, even if the market is clearly heavier than during the first half of the year, it remains good— especially for issuers that have a good track record in this type of instrument, or issuers with highly appreciated names in the market. HSBC, for instance, who came the day before us, and ourselves — these two issues were, I think, well received by the market with large order books.

So, the market is of course heavier than in the first half, but in a sense it’s a market more balanced between issuer and investors — and anyway we didn’t expect this euphoria of the first half to last forever.

Day, BIHC: Every time you’ve done an AT1 transaction, you’ve done a roadshow. Why do you place so much importance on this?

Bélorgey, Crédit Agricole: These are high yield instruments, and even if it’s the forth or fifth time we are issuing, and even if some issuers have used this instrument many times now, it remains rather a new instrument, with a level of risk that is clearly not at all the risk of senior unsecured issuance. We therefore think that it remains important for us to go and see the investors to re-explain all the features.

And, to be honest, each time we have done so we have seen the market evolving and investors focusing on more and more detailed and specific elements of the structure and regulations. As evidence of that, I would say that in January the market was very focused on the write-down mechanisms and all the buffers before write-down – and that’s practically all that was focused on. After that, in April, the market was focused on the mandatory distribution restriction — and this was natural, as it is a very pertinent issue. So the market has understood, OK, I have big buffers before write-down, but will I receive my coupon? Because in the regulations there are some elements that are tricky to understand in relation to cancelling the coupons. So the market was focused on what these elements are, what kind of buffer there is before that eventuality. And right now, in September, the market was even more precise: on top of these buffers in relation to coupon cancellation, they also focused on what we call distributable items that you have in order to pay the coupon.

So we think that the market is not yet mature, and that it was worth doing another roadshow. And I think also it’s a sign of respect towards investors to come and see them face to face, one on one, when you sell this kind of high yield instrument.

Day, BIHC: Were there any structural changes for this new issue?

Bélorgey, Crédit Agricole: There were only two very small amendments to the structure, both dictated by regulatory developments. One concerns the contractual acknowledgement of the EU authorities in terms of bail-in as this new paper is issued under New York law, and the other element concerns the cap on the maximum write-down amount. I won’t enter into the details here, because it is very technical, but clearly these was only very minor adjustments that were necessary given in light of clarity on the regulations.

Du Boislouveau, Crédit Agricole CIB: And we can say that during the roadshow — whether in London, New York or Boston — this structure was very well understood, and we had no specific questions on the already well-benchmarked dual trigger structure, to be frank.

Bélorgey, Crédit Agricole: Yes, and I think that the investors responded very well to the fact that we took the time to explain these little differences, which were very technical.

Du Boislouveau, Crédit Agricole CIB: One thing that is very interesting that we heard — not during this roadshow but the previous one — is that some of these investors want to be treated similarly to equity investors. That’s the reason why they want to be as close as possible to issuers, and that’s also probably the main reason why CASA is spending so much time on the road, explaining its funding strategy and especially what it intends to do with this type of instrument.

Day, BIHC: Did the aftermath of BES present any challenges?

Bélorgey, Crédit Agricole: Our CFO did a wonderful job in this respect when explaining the first half results, and to be honest only perhaps one-third of the investors asked us about BES, and it was more or less to have confirmation of what our CFO explained in August. So it was not a problem.

Day, BIHC: Why was a PerpNC5 structure chosen? Did you consider a long five year non-call period like Société Générale or HSBC?

Bélorgey, Crédit Agricole: We told investors that we were very flexible on the date of the first call, either non-call five or non-call 10, and we just gathered up investors’ requirements and chose the maturity that fitted the majority of them. And after that we chose to be very simple.

Day, BIHC: How much have you raised in AT1 format so far and what are your plans by 2016? Will we see CASA back in the capital space soon?

Bélorgey, Crédit Agricole: We have already raised Eu2.9bn plus this one, which was just over Eu0.9bn, so we have already raised a little more than Eu3.8bn. Our target for the medium term plan for the period 2014-2016 was Eu4bn plus. Due to the methodological change of S&P, during the roadshow I indicated to the investors that our revised target will probably ultimately be more around Eu6bn than Eu4bn.

We will be a little opportunistic and it will depend on the appetite of the market and so on and so forth, but we don’t need to return to market very quickly in the coming months. That leaves around Eu2bn for the next two years.

In our medium term plan we disclosed a capital plan whereby we do not issue any Tier 2, but I clearly indicated to investors that this medium term plan was built without taking into account all the discussions concerning MREL and GLAC or now TLAC. Obviously these discussions will now steer us to issue some Tier 2 one day. I don’t know exactly the quantum, but the next move will also be in the direction of Tier 2. Right now it’s really too early to give the market precise indications.

Another thing I mentioned to the investors is that due to the methodological change made by S&P on the hybrid instrument issued by our insurance company, it gives us some more economic incentive to issue hybrid instruments through our insurance company directly into the market, rather than the current situation, where all its issuance was subscribed by Crédit Agricole SA and the banking side. Due to the evolution from Solvency I towards Solvency II, it would have been efficient to issue directly from our insurance company into the market from 2016, but this S&P methodological change makes it relevant right now. So I also indicated that we had different instruments available to partially compensate for S&P’s change, either issuing a little more at bank level and also issuing potentially — it’s not a commitment — partly through our insurance company.

Day, BIHC: This was the first time that you have appointed a sole bookrunner for a deeply subordinated US dollar transaction. Were you satisfied with the structure of the syndicate, the pricing parameters and quality of the order book?

Bélorgey, Crédit Agricole: Absolutely. Our CIB has made a lot of progress, and a lot of investment to be in that position and to be credible in that role. In fact it’s also part of our medium term plan objective for our CIB. The market was a little surprised by our ambitions in terms of the CIB business. We explained that we deleveraged a lot during the crisis, perhaps more than some competitors, and that right now, in a client-driven environment and business, we wanted to invest more in what we call our CIB debt house. We therefore invested in this fixed income platform, and to be honest the results have reached our targets. On this transaction the syndicate was successful, while the sales team did a wonderful job. We had more than 400 clients — that’s clearly a great result.

Du Boislouveau, Crédit Agricole CIB: The main thing I would take away from this transaction is the focus the issuer placed on trying to be as consensual as possible and acting in the way investors expect when bringing a transaction to the market. The issuer is clearly showing that it invests time in a dialogue with its core investor base for these high beta transactions, as demonstrated by the success of this deal. Despite the fact that a couple of recent transactions were put in the market in a much more awkward manner, Crédit Agricole managed to garner a book of $7.5bn with a good spread performance after the break, and it is still the case today. This proved that the way CASA is executing its global funding strategy and tactics for its funding is spot-on.

Day, BIHC: What do you expect from the forthcoming AQR?

Bélorgey, Crédit Agricole: I cannot disclose anything. What I should indicate to the investors is that we don’t expect any material impact from the AQR.

What factors influenced the approach to pricing?

Vincent Hoarau, Crédit Agricole CIB: The pricing rationale looked straightforward at first sight. CASA’s 7⅞% 01/29/49 was bid at 105.75%, or 7.10% in yield-to-call and an I-spread of 450bp before the initial price thoughts were announced.

Based on pricing levels for HSBC’s US dollar PerpNC5 and PerpNC10 the previous day, the curve was flat between five and 10 years. With the five year US dollar swap rate at around 1.95% during the process, the area of mid-6% YTC looked like fair value.

Nevertheless, Société Générale’s curve was strongly inverted, with a spread differential between its 6% 10/27/49 (NC5) and 7⅞% 12/29/49 (NC10) of around 40bp. On this basis many investors argued for a higher coupon level. Meanwhile, some key investors saw a credit spread differential of 100bp between an investment grade HSBC AT1 and non-investment grade CASA AT1. HSBC’s PerpNC5 was priced at 5.625% the day before CASA priced. Finally, some opportunistic buyers highlighted an eye-catching 7% coupon mark as the lowest level at which they would commit in primary.

Given market circumstances and investor behaviour in previous deals, we could not afford to ignore that. We therefore tried to adopt a consensual approach, but kept in mind the range of 6.5%-6.75% as a pricing target subject to the new issue premium ultimately requested. We set IPTs at 6.75%-7% early morning, and in doing so incorporated the wide range of investor feedback. We verbally gave guidance to investors on sizing, saying that $1.5bn was off the table, and incorporated a scarcity element in the process while ensuring a strong bookbuilding process.

When books crossed the $5bn mark we refined guidance to 6.625% (+/- 0.125%) and waited for the New York open and further traction from US investors to fix the coupon and announce a transaction of $1.25bn. Books closed around the $7.5bn mark, with more than 400 investors engaged.

CASA has been very active this year in the AT1 space while the market turned less issuer-friendly. Did you feel any kind of “CASA fatigue”?

Hoarau, CACIB: Not at all. The perception of the signature has improved significantly since the darkest phase of the crisis and the sale of Emporiki. The equity story and the solid credit spread performance is a perfect illustration of the appetite for the signature. Elsewhere, outstanding CASA AT1s outperformed the rest of the market during the sharp correction move in early August. Investors like that. So the appetite for the credit is intact and real money investors continue to increase exposure. They love the retail-focused business model of the group, the level of capital generation, the group guarantee mechanism, but also the levels of distributable items.

Did you experience any resistance to pricing?

Hoarau, CACIB: Resistance to the IPT level was virtually non-existent since we adopted a consensual attitude and listened carefully to investors. Nevertheless, there are lot of opportunistic and fast money investors out there. Some of them dropped out when we fixed the coupon at 6.625%. The size of $1.25bn was widely accepted.

The USD AT1 curve of your direct peer Société Générale is inverted, but CASA’s PerpNC5 was priced flat to the outstanding PerpNC10 launched in January 2014 — how come?

Hoarau, CACIB: HSBC had set fresh references in the market, pricing NC5 and NC10 tranches in US dollars flat to each other in terms of spread versus swaps. So there was no point in considering Société Générale’s outstanding curve. In the secondary market there are lot of anomalies and sometimes outstanding references are bad guides.

You executed this USD RegS/144a transaction intra-day, while you adopted a longer execution timeframe for the inaugural trade. Why was that?

Hoarau, CACIB: You are right. Back in January, when we executed the inaugural US dollar AT1 trade, we opened books in Asia hours and continued bookbuilding into European and US hours. But the markets have proven to be very volatile those days — overnight risk is back — and the investor mood is also very erratic, while we did not expect much traction out of Asia. Markets and investor behaviour have changed, so we adapted the execution strategy accordingly and executed the transaction intra-day.

Regarding the profile of Asian demand, it has changed drastically since the beginning of the year. We see more institutional-style buy-side accounts and hedge funds involved. Asian private banks have almost left the market and their strong participation in the inaugural HSBC AT1 transaction was due to the investment grade profile of the trade and, more importantly, the footprint of the issuer in the region.

Were you satisfied with the bookbuilding process and the quality of the order book? Did you see any major change in the distribution profile?

Hoarau, CACIB: We were extremely satisfied. It was key for us to demonstrate that confidence had been restored in the AT1 segment. And $7bn and 400 investors is a strong headline, no?

But the inaugural CASA US dollar AT1 transaction attracted $24bn with more than 900 investors involved. How do you explain the difference?

Hoarau, CACIB: Demand out of Asia has decreased significantly, with limited support from private banks in AT1s. Lot of fast money, opportunistic buyers and low quality hedge funds across Europe also quit the segment since the sharp correction in August. In general, investors are much more selective and price sensitive, so the profile of the books and sizes change. More importantly, order inflation has disappeared in most transactions. In primary we will observe a strong differentiation going forward. Inaugural core AT1s will be synonymous with frenzy and inflation, and the others with sober investors.

How did the deal perform in the aftermarket?

Hoarau, CACIB: The bonds traded up off the break, up to 100.5% and down to 99.50% one day after pricing, before stabilising around par. As mentioned earlier, the level of inflation in this trade was very limited and the final size of the book reflected the real size of the demand. So a secondary trading level close to par implies pricing and sizing were spot on.

This was CACIB’s debut as sole bookrunner for a deeply subordinated US dollar-denominated transaction. Did you experience any specific challenges and were you satisfied with the overall outcome?

Hoarau, CACIB: We were sole bookrunner for CASA’s inaugural euro-denominated AT1 transaction back in the second quarter. So the sole bookrunner role for a US dollar benchmark was a natural objective for the capital markets franchise. Working alone for the mother company is a challenge per se. There is zero tolerance and you must tick all the boxes. You can’t rely on a group of banks.

When we look at the pricing level, aftermarket trading as well as the quality, granularity and overall size of the order book, we are highly satisfied. Over the last two years, CACIB has invested a lot in the hybrid franchise, particularly in the distribution capacity of the US dollar platform. Now, we have a strong set up in place with Coverage, DCM, Capital Solutions, Syndicate, Trading, Sales and Research fully aligned.

How do you expect the AT1 market to evolve for the rest of the year?

Hoarau, CACIB: In Europe, I think we will face some hectic moves around the AQR announcement while the geopolitical environment will remain unstable for some time. Volatility in equities might increase again, with some spill-over effects in the AT1 space, which is highly correlated with the evolution of stock markets.

Spreads should find a floor for the rest of the year, with the 5% coupon mark as a critical resistance level and zone of profit-taking.

Why did CNP Assurances come to the market with a subordinated bond at this time? 

Vincent Damas, CNP Assurances: Market conditions are very favourable to issuers, with low interest rates and credit spreads having compressed over the past 18 months. In today’s markets, windows of issuance are remaining open while new issue premiums are falling. This situation contrasts sharply with the 2008-2012 period, when spreads were volatile and tending to head northward.

So we considered it was time to take advantage of this market backdrop and to progress in our regular funding programme.

Insurance sector spreads and yields are at historically low levels. Was this a factor in choosing to come to the market now?

Stéphane Trarieux, CNP Assurances: Subordinated debt is a high beta instrument, which exacerbates widening and tightening spread moves more than any senior unsecured debt. In today’s historically low yield environment, appetite for such investment opportunities out of the insurance sector is growing. The headline coupon of our subordinated 31 non-call 11 structure reached 4.25%, which is the lowest level ever achieved by CNP Assurances since its first subordinated issue in 1999.

Stéphane Trarieux, CNP Assurances

Were you satisfied with the execution of the deal in terms of size and demand? 

Damas: CNP Assurances decided to cap the size of the issue at Eu500m from the outset. We enjoyed an order book almost 10 times as large as the transaction size. On the back of this strong response, initial guidance was tightened by 15bp from initial price thoughts of mid-swaps plus 275bp to mid-swaps plus 260bp. This level implies zero new issue premium.

Why did you not hold a roadshow? Was there any marketing ahead of execution? 

Trarieux: CNP Assurances’ signature is well known by investors and very well established across the board. We have a long track record in the primary market, with several benchmark issues in various markets and currencies — euros, US dollars and sterling — and with a greater frequency of issuance since 2010.

Nevertheless, permanent investor dialogue is key and essential. This is why we conducted a pan-European credit update in April to present our 2013 annual results.

Why did you choose the 31 non-call 11 structure? 

Damas: The 31 non-call 11 structure is the right instrument to lengthen the average duration of our debt. It also leaves us the possibility of tapping that particular bond during one year if we need to.

We opted for the traditional insurer-style Tier 2 structure, as it is well known and accepted by investors. This structure is eligible under Solvency I, Solvency II and offers equity credit from the rating agency standpoint.

More generally, how is the transition to Solvency II affecting your capital planning and needs?

Trarieux: CNP Assurances was one of the first European insurers to launch a Solvency II-compliant Tier 2 transaction as early as September 2010. Since then, this format has become a standard in the industry although Solvency II had not even come into force. At that point in time the final rules had not even been officially published.

Like every insurance company, we are benefiting from measures taken by the Directive Omnibus 2, which establishes the grandfathering until 2026 of debt issued before 2016. This transition period is long enough. It offers a great degree of comfort with regards to the eligibility of our debt. It also allows a smooth replacement of our maturing debt.

Michael Benyaya, DCM Solutions, Crédit Agricole CIB: There are no identified capital needs stemming from the implementation of Solvency II for the largest insurance companies. This is notably highlighted by the absence of large capital increases in the insurance sector launched to comply with the new standards. Insurance companies remain active on the subordinated debt market, but this is primarily for refinancing purposes.

The flexibility of the grandfathering provisions provides insurers with a high degree of visibility in terms of capital planning. These grandfathering arrangements have led to the resurgence of the Solvency I format and a couple of issuers have even issued perpetual Solvency I bonds to benefit from a grandfathering of Tier 1 in the Solvency II capital structure.

That said, the vast majority of issuers, like CNP Assurances, continue to demonstrate a strong willingness to adhere to the Solvency II standards despite the remaining uncertainties, notably introduced by the recent EIOPA texts and in particular the publication of the Technical Specifications in conjunction with the Stress Tests.

(See below for further details.)

To what extent are differences between rating agency and Solvency requirements a challenge in your capital planning and also bond issuance?

Damas: So far the insurance sector has benefited from relative stability of rating methodologies for hybrid instruments as well as from their treatment in the economic capital. We think that the rating agency methodologies will evolve and could gradually converge with the prudential rules of the European Union. In the mid to long run this should offer greater visibility with regards to the eligibility criteria of the outstanding debt in the market. To the best of our knowledge, we have not seen any rating agency-driven early calls of insurance hybrid debt. And we are not aware of any projects to modify insurance hybrid debt criteria.

Vincent Damas, CNP Assurances

Is the perpetual structure that was used by Allianz in late 2013 of interest to CNP Assurances? Are similar issues in your plans?

Trarieux: We are closely looking at any such structures, and already in 2012 we issued perpetual transactions denominated in US dollars on the back of the strong appetite of Asian private banks. We don’t rule out coming back in perpetual format in euros, depending on our capital planning needs and subject to market conditions.

How EIOPA standards affect structuring

What are the key structuring developments introduced by the recent EIOPA texts?

Michael Benyaya, DCM Solutions, Crédit Agricole CIB: EIOPA has specified the form of incentives to redeem that are not limited and hence not compliant with the Solvency II framework. This includes a change in the distribution structure from a fixed to a floating rate combined with a call. This will probably be a major point of contention between EIOPA and issuers as the majority of transactions targeting direct Tier 2 Solvency II eligibility have used a fixed-to-floating mechanism. In addition, EIOPA texts also clarify that early redemption calls — e.g. tax/regulatory/rating agency — are not allowed prior to five years from the date of issuance. However, substitution and variation language will be allowed.

In this context, what were the key elements of the structure utilised by CNP Assurances?

Benyaya: The 31NC11 bond targets direct Tier 2 eligibility under Solvency II and qualifies under Solvency I in the dated category up to 25% of capital requirements. The structure effectively absorbs some of the recent developments in relation to Solvency II own funds released by EIOPA. The coupon structure thus has a five year interest reset period after the first call date, in lieu of a fixed-to-floating mechanism, which seems to be considered as an incentive to redeem that is not limited and not compliant. EIOPA’s clarification on early redemption calls is addressed by a provision in CNP Assurances’s 31NC11 bond whereby the early calls at par upon tax, regulatory or rating methodology events and the exchange and variation clause upon a regulatory or a rating methodology event will automatically lapse if, at any time following the implementation of Solvency II but before the first reset date, they would prevent the notes from being treated as at least Tier 2 under Solvency II including for the purpose of compliance with any grandfathering provisions.

What are the key drivers for issuing a dated subordinated bond while some issuers have used a perpetual format to potentially benefit from a grandfathering in Tier 1 under Solvency II?

Benyaya: In contrast to banks, there is no specific focus at this stage on Tier 1 in the insurance sector and there is no identified need for Tier 1 capital under Solvency II for the largest issuers. CNP Assurances will also benefit from the full eligibility of the expected profits in future premiums in unrestricted Tier 1 as well as the probable grandfathering in restricted Tier 1 of the legacy perpetual hybrid.

Another important driver is that there is no additional equity credit benefit for the perpetual format in the S&P methodology as it can qualify in the intermediate content category like the dated format. CNP Assurances is currently only rated by S&P and hence does not specifically target the higher basket recognition with a perpetual format afforded by the Moody’s criteria. Finally, a dated format carries obviously a lower coupon hence protecting the fixed charge coverage ratio which is closely monitored by insurance companies in the current environment.

Bernard Delpit, Crédit Agricole Group CFO. Photo: Hervé Thouroude

How long had you been considering this inaugural CRD IV AT1, and what were the major obstacles that had to be overcome before issuance?

Bernard Delpit: We’ve been working on new hybrid capital for one year. In September, CASA issued a CoCo Tier 2 and the disclosure of our fully-loaded ratio on 7 November paved the way for our inaugural AT1. We therefore actively worked on it from November, and the only other hurdles were technicalities that we solved from a legal perspective and from a structuring perspective in December.

How did the “dual-trigger” affect the marketing of the trade?

Olivier Bélorgey: When we first released the structure in the market, the syndicate of course had some feedback from investors asking: what is this dual-trigger, where is it coming from, and so on. But we began the roadshow just after releasing the structure and all the answers we provided investors with were very quickly accepted and well understood.

In fact the dual trigger has a very strong relationship with the rationale for the deal. We had to include a trigger at CASA level due to legal requirements: it’s an issuance made by Crédit Agricole SA, so, according to CRD IV, we had to introduce a trigger at the level of CASA. But — as we have been explaining to the market for many years now — when you are assessing the solvency of Crédit Agricole, you first have to look at the group level, so on top of this regulatory constraint we wanted to add something linking this AT1 issue with the group level. Concerning the group, we wanted firstly to be consistent with the Tier 2 issue’s trigger at 7% CET1, and secondly, we wanted to position Crédit Agricole Group clearly within the best market standard when it comes to G-SIB institutions and the going-concern framework. It was not the same for Crédit Agricole SA — due to all the internal support mechanisms we only intend to put Crédit Agricole SA at an adequate level in terms of capital.

At the beginning of the transaction our advisers were telling us that perhaps the trigger and its complexity could cost us something between 25bp and 50bp, but at the end of the day it didn’t cost anything.

During the roadshow, did investors ask a lot about Crédit Agricole as a credit? What did they focus on most?

Bernard Delpit: Indeed questions from investors tackled both the features of the instrument and the credit of Crédit Agricole. The somewhat unique structure of the group was discussed. The normalisation of our situation in the past year was well perceived by investors, Credit issues were quite easily answered and people focused on the features of the instrument. Credit was not really, I think, at the heart of this transaction since we’ve done a lot to demonstrate that Crédit Agricole is back on track in terms of liquidity, profitability and earnings visibility.

What was your rationale for the non-call 10 choice?

Olivier Bélorgey: In fact we indicated to the market that we were ready to issue non-call five or non-call 10, and we were waiting for the market’s answer. The market was mainly in favour of a non-call 10, so that element of the structure depended on investors.

And on the other hand, from a pure ALM point of view, given the total size of AT1 we should have as a target in our capital structure we are more at ease with a non-call 10 instrument, with implicit pressure from the market to refinance the instrument at 10 years rather than five years even if it is of course a perpetual instrument.

Did you consider going down the euro issuance route?

Olivier Bélorgey: We are totally open to it, but obviously in the current market high yield instruments are better appreciated by US dollar investors rather than euro investors. So it was not a strong preference on our side, but clearly we follow market appetite.

What can you say about how you plan to use the variety of hybrid instruments available?

Olivier Bélorgey: It was also part of the rationale of the transaction — which we clearly explained to the market — to follow the capital plan we released to the market in November, which is for Crédit Agricole Group to reach a total solvency ratio of 16.5%, 13% consisting of Common Equity Tier 1 — which is a very high level — and the remaining part consisting of 1.5% of Tier 1 and 2% of Tier 2.

Given our starting point, with 1% of Tier 1 and 3% of Tier 2, we clearly have an initial focus on Additional Tier 1, so that’s why we began 2014 with AT1, and we indicated to the market that it will remain our main focus for the coming months.

Bernard Delpit: If I may elaborate on that: we are definitely in the category of banks that will structurally accumulate Core Tier 1 for two reasons. The first one is that at the heart of Crédit Agricole are co-operative banks, which basically pay no dividends, and since 56% of the listed entity is owned by the regional banks 56% of what it pays out stays within the group. So thanks to our structure, and thanks also to our business model, retained earnings will drive us to this high level of Core Tier 1. So that explains why we have a high level of Core Tier 1 in our capital planning.

And, as Olivier said, we want to add 1.5% AT1 at the group level for different reasons, including regulatory reasons, and going from 1% to 1.5% at the end of 2015 means that we will be an active player on this AT1 market. On top of that we have to offset the grandfathering of old-style Tier 1, so although we have not disclosed the amount we will issue, it will be quite significant, and we will be coming back to the market every year to raise AT1.

Olivier Bélorgey: We did not provide the figures publicly, because we want to retain flexibility on amount and timing, but we clearly indicated that we would come back. And we also indicated that the structure of the instrument is built to be more or less reused in further issuance, perhaps with some minor evolution due to regulations.

What are the major challenges for the Crédit Agricole Group over the next few years?

Bernard Delpit: Most of the adaptation has already been undertaken in terms of business, geographic scope and capital planning. We are now working more on leverage size. We will focus on reducing the total size of Crédit Agricole’s balance sheet, and we will focus on the bail-in issue. And from both points of view — leverage and bail-in — AT1 is a key element of our strategy.

We have seen French banks making up a high proportion of Tier 2 and AT1 issuance in Europe as the market has taken off. Is this a coincidence or is there a trend?

Bernard Delpit: From 2011 to 2012 our supervisor was not really eager to see French banks issuing hybrid capital instruments. The key message was to focus on Core Tier 1. But you can’t build a comprehensive capital structure with only Core Tier 1.

In 2012, for rating reasons — to support our RAC ratio from S&P — and for regulatory reasons, the French supervisor gave a green light to the issuance of new instruments. That’s why we saw French issuers very active in the market.

For more on Crédit Agricole’s AT1 transaction, read:

CoCos: View from the buy-side

CASA hits target with dual-trigger