You can download a pdf of this article alongside further BIHC coverage here.

Abundant liquidity and attractive yields for investors combined to offer financial institutions prime conditions for new issuance in January, and they duly delivered, with the resilient market proving able to absorb not just heaving supply but also the latest geopolitical headlines.

The primary market quickly picked up where it left off approaching year-end, albeit buoyed by higher rates, following the back-up through November into December.

“The liquidity-carry combo is front and centre when it comes to the momentum of the market and spreads,” said Vincent Hoarau, global head of FIG syndicate at Crédit Agricole CIB, which has enjoyed its strongest start to a year at the heart of primary supply. “We have seen compression across jurisdictions and the capital structure, spurring a surge in Tier 2 alongside rare AT1s.

“More and more euro investors are looking at Tier 2 and SNP securities on a yield basis and the 4% mark feels like a magic number, at times regardless of the level of subordination,” he added. “At the same time, in covered bonds, 3% is a coupon for triple-A paper that the buy-side just doesn’t want to miss, particularly when unsecured spreads are so compressed.”

Duration has commensurately been in vogue, as exemplified by Deutsche Bank on 8 January, when it attracted some €7bn of orders to a €1bn 15.3 non-call 10.3 Tier 2 transaction that was the first public euro Tier 2 issue from a European bank with a 15 non-call 10 structure since 2008. The German bank’s first euro Tier 2 issue in almost four years also achieved its tightest ever pricing for a public euro Tier 2 transaction, following a necessary price discovery process and discussion over the fives to 10s curve.

Similarly, at the tight end of the FIG spectrum a rich vein of long-dated covered bonds was capped by a 15 year benchmark for Deutsche Kreditbank on Tuesday, upsized to €1bn as its 3.5% coupon proved tempting for many accounts.

Perhaps inevitably, the market’s biggest tests in January came from US president Donald Trump. Markets swung into risk-off mode after his Saturday, 17 January threat of tariffs against European countries resisting the US’s desire to acquire Greenland, with the iTraxx Crossover widening significantly and issuers retreating to the sidelines, before a quick pullback from the brink, following discussions in Davos on Wednesday, 21 January, saw a powerful relief rally.

“Trump’s softer stance, ruling out military force and announcing a NATO framework, triggered an immediate reversal,” said Cécile Montfort, global head of FIG DCM at Crédit Agricole CIB (pictured). “Thursday then delivered the week’s strongest session, with eight issuers rushing to capitalise on renewed appetite.”

Montfort agreed that, beyond the geopolitical headlines, deeper structural dynamics are behind the market’s resilience.

“Performance is fundamentally driven by technical factors,” she said, “abundant liquidity, with rebalancing flows from equity, gold, and commodities supporting fixed income demand. Bank and insurance fundamentals remain solid: strong balance sheets, robust liquidity profiles, and manageable cost of risk offset by efficiency gains.

“Yet these fundamentals alone don’t justify the material spread tightening observed in 2025. With asymmetric risk — higher probability toward widening rather than further compression in 2026 — issuers seized the favourable January window to advance their funding programmes.”

Overall euro financial institutions supply last month was up 11% on January 2025, rising from €73.65bn to €81.55bn, with a 32% surge in benchmark covered bond issuance, from €21.6bn to €28.5bn, driving the increase.

“We have enjoyed a very supportive environment in the asset class, with exuberant moves from guidance and eye-watering order books at the start of the year, before normalising towards late 2025 levels,” said Matthew McFarlane, FIG syndicate, Crédit Agricole CIB. “Investor appetite has been driven by excess cash and the level of total returns covered bonds are offering for a triple-A product, with an increased number of credit investors involved, including hedge funds.

“We have hence seen spread compression and tested a new pricing paradigm, with the differential between Bund and covered bond yields trading at long time lows.”

Unsecured volumes finished the month roughly in line with 2025 and the average over the past three years, with senior preferred/OpCo issuance down 18% on last year, but investors’ willingness to take down higher beta instruments helping supply of SNP/HoldCo paper increase 8%, Tier 2 16%, and Tier 1 63%.

The dollar market proved even stronger, with US bank issuance in January the highest ever single month’s supply, at $52.5bn. This was also within the context of overall investment grade supply that beat expectations to come in at $222bn, the most ever in the first month of the year, and the fifth highest of any month. The IG index meanwhile closed the month at 74, 7 tighter than at the start of the year and matching the lowest level seen across 2025.

Connor Prochnow, US debt syndicate at Crédit Agricole CIB, reflected the focus on technicals and fundamentals.

“Inflows have started the year very strongly,” he said. “Thursday’s number was the biggest since 2021.

“And against a backdrop where concerns — the few that there are — are more focused on the tech space, with the AI narrative, the fundamentals of banks are strong. They’re extremely well capitalised and in a solid position, and that keeps them in a really well-supported position — both US and Yankee banks.”

The bank supply included $16bn (€13.5bn) from a single record-breaking Goldman Sachs deal, split into six tranches ranging from three to 21 years, on 14 January, with the big six banks overall more active than ever. While investors may have proven particularly accommodating to such volumes, supply-side drivers contributed to the peak, too, with Goldman and Morgan Stanley, for example, looking to fund buoyant capital markets businesses, and Wells Fargo growth following the lifting of its asset cap last year. Goldman Sachs, Morgan Stanley and JP Morgan meanwhile saw opportunities to optimise their capital in subordinated trades.

“Replacing Tier 1 with Tier 2 is a theme among US banks,” said Prochnow. “A lot of them have an excess of CET1 capital, and as their preferred shares come off, they’re replacing them with cheaper Tier 2.”

Something for everyone

The primary market was quieter in the second half of the month, mainly due to blackouts. However, the absence of bigger players allowed smaller to medium-sized banks to steal the limelight.

“It has offered them a great opportunity to come to the market, issue at very attractive levels, and get very good demand, too,” said Neel Shah, financial credit analyst at Crédit Agricole CIB. “Clients are having to put cash to work, and that has benefited these medium to small-sized banks in the past couple of weeks.

“We’ve seen a lot of Tier 2s from Italian, Spanish and Greek banks at levels that, if you go back one year, would have been unheard of, with pricing at or inside fair value, and close to the national champions.”

Foremost among this supply was a €400m 11.25 non-call 6.25 Tier 2 for Greece’s Eurobank on 22 January. The bond, rated Ba1, attracted over €3.8bn of orders, allowing pricing to be tightened from initial price thoughts of the mid-swaps plus 200bp area, through guidance of the 170bp area, to a re-offer of 160bp.

Such supply came on the back of bumper Tier 2s for bigger names — as well as Deutsche’s aforementioned landmark, BPCE, for example, attracted as much as €9.4bn of demand to a €750m 11 non-call 6 at least 10bp inside fair value.

“Issuers are achieving very competitive pricing in Tier 2,” said Hoarau (pictured), “with the SNP-Tier 2 spread differential at a record low and callable Tier 2 levels at Covid lows.

“Investors are hardly being compensated for the subordination element and having to buy at spreads they would rather pass on,” he added. “Sitting on cash is very costly and being short FI credit very tricky.”

After UniCredit kicked off 2026 AT1 issuance with a €1bn perpetual non-call five trade on 12 January, Raiffeisen Bank International (RBI) hit the market the following day, selling a €650m perpetual non-call 6.9 deal in conjunction with a tender for a €500m 6% issue coming up for call in June.

Insurers joined in the New Year bonanza, with Groupama and Unipol selling RT1 issues of €600m and €1bn, respectively, while €650m Generali and €750m Crédit Agricole Assurance Tier 2 deals were followed up by an inaugural trade for France’s Carac. The debutant on Wednesday sold a €300m 20 non-call 10 Tier 2, rated BBB+, 40bp inside IPTs at 160bp over mid-swaps on the back of some €5.9bn of orders.

Conditions for financial institutions are expected to remain healthy as they exit blackouts and supply picks up.

“The market feels very well supported right now,” said William Rabicano, director, credit trading at Crédit Agricole CIB. “With supply increasing again, there could be a bit more saturation in the market, and I don’t think we can continue squeezing much tighter, because levels do look optically quite stretched, and with all these geopolitical noises, we are seeing decent two-way flows.

“But there’s definitely still cash to put to work and I would expect issuance to still be well received unless something significant happens.”

Indeed, looking ahead to the coming weeks and months, Crédit Agricole CIB’s FIG team maintains a constructive outlook on spread evolution for financial institutions.

“While there appears to be limited room for further compression across the capital stack, the technical support for bank funding instruments remains exceptionally strong,” said Hoarau. “Expecting relatively few euro AT1 instruments in the first half of 2026, we anticipate negative net supply in Tier 2, with bank liquidity funding volumes remaining fully manageable.

“This situation is likely to persist until issuers begin pre-funding the upcoming wave of redemptions in 2027.”

Currently, excess liquidity prevails as inflows in euro credit funds continue and central banks, mainly the Fed, remain rather accommodative.

“Today, the world debates the potential for an AI-related market bubble, with two important questions being, the magnitude of hyper-scaler funding needs investors will have to absorb in the coming months, and its possible impact on spreads for banks,” said Hoarau.

“Markets are anticipating higher interest rates and steeper yield curves, particularly as the Bank of Japan confirms the end of the carry trade,” he added. “However, we cannot dismiss the risk of economic growth setbacks in Germany and France in the near term. A less hawkish stance from Christine Lagarde and a pivot from the ECB could further support tight spreads to German Bunds.

“In the short term, the dramatic decline in commodity prices and certain stocks serves as a reminder of some fragilities in the market. A conflict with Iran would amplify this week’s decompression — healthy before spread performance can resume after a fast and furious month of January.”

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

Blackouts contributed to subdued supply in euros this week, with only €6.5bn of unsecured benchmarks from seven banks hitting the primary market, although it proved receptive even after a string of political — domestic and international — developments, and question marks over credit quality, particularly in the US.

“In spite of the slightly higher volatility we have seen, I continue to be impressed by how resilient the market is,” said André Bonnal, FIG syndicate at Crédit Agricole CIB. “The reason is the same: the liquidity situation, especially when combined with the carry that investors can enjoy at the moment in credit and specifically financials — from an all-in yield perspective, it’s still pretty much on a par with where we were in Q4 2024, despite the spread environment being tighter.

“So we still have a very solid market. It may not be as exuberant as it was in September or earlier in October — it’s maybe a seven-and-a-half or eight out of 10 market now, if I can put it like that, whereas in September — after a record month of supply in August — it was probably as close to a 10 out of 10 market as you’re going to get”

Translating this into new issue premiums, this equates to around 2bp-5bp rather than the zero NIP market of a month ago.

“And with spreads remaining pretty near year lows,” added Bonnal, “it’s also a market where investors continue to be happy to go longer on duration, or go down the capital structure for names they like.

“We continue to see spread compression — across regions and across the capital structure — and compression on the credit curve.”

Such trends were evident in the success of new issues for Greece’s Alpha Bank and Dutch insurer Achmea this week (see below and separate Alpha Bank article for more).

“It’s quite telling that you can have a couple of days, like last Thursday-Friday, when the market is quite shaky and seniors are, say, 4bp-5bp wider,” added Bonnal, “and then the next couple of sessions we have a short squeeze, as any widening is seen as an opportunity to buy by investors.”

However, recent headlines and volatility remain prominent in market participants’ thoughts.

“We have a bit of a nervous market at this point,” he said. “We have had a higher volatility environment over the past couple of weeks and have seen the first signs of cracks on the credit market.

“So investors have been asking themselves if maybe they are missing something.”

Connor Prochnow, US debt syndicate, Crédit Agricole CIB, echoed this.

“Outside of the French political environment, which has limited read-across over here, there hadn’t really been any external factors being a huge talking point in our market,” he said, “but now we’re dealing with two.

“One is the government shutdown, which is now in day 24. Frankly, we don’t see any light at the end of the tunnel and I, personally, wouldn’t be surprised if we get into November and are still shut down. And the impact that is having on economic data is notable.”

In the latest impact from the shutdown, the White House on Friday said that it will lead to inflation data probably not being released next month. While this should not directly affect the coming week’s FOMC decision — a 25bp rate cut is deemed most likely — it could present problems further down the line.

“It was pretty evident that at the September meeting the committee is still mixed in terms of its perception of the economy and the fact that there are mixed signals on both sides of the dual mandate,” said Prochnow. “So that could make things a little bit tricky as we get into year-end.”

The second external factor is the return of credit problems among US banks, resulting from headline names such as First Brands and Tricolor. JP Morgan Chase CEO Jamie Dimon’s comment last week that “when you see one cockroach, there are probably more” fanned fears around private credit, although the debate has since become more nuanced and balanced.

“There is now a broader discussion around credit quality and the financial system as a whole,” said Prochnow (pictured below). “How much is the system exposed if credit leaks start to occur?

“Those two external factors have been more of a talking point in an environment where we haven’t had a tonne of supply to occupy us,” he added.

Indeed, as financial stocks have been recovering and earnings proving reassuring, the primary market in the US has shown resilience, particularly when it comes to banks. In the wake of post-earnings issuance from the likes of JP Morgan, Goldman Sachs and Morgan Stanley, this week saw issuance from second tier names, including American Express, TruWest and State Street.

“The fact that we saw significant pressure in regional banks on Thursday of last week (16 October) and then on Monday we can see these institutions doing benchmark deals with very solid execution is a pretty strong statement,” said Prochnow.

Banks have contributed 60% of all investment grade supply this month, $32.6bn out of $53.5bn, and even though overall IG supply is down some 44% on October last year, year-to-date issuance is roughly flat, noted Prochnow, with so much funding having already been done.

Insurers hit the spot

In euros, with most European banks yet to report earnings, financials supply was limited this week — the two largest trades were for north American names, Bank of Montreal raising €1bn and Bank of America €2.75bn of bail-in debt on Tuesday and Wednesday, respectively.

The most significant subordinated debt came not from the banking sector but insurer Achmea, on Monday. Its €300m no-grow perpetual non-call 10.75 Restricted Tier 1, expected ratings BB+/BBB (S&P/Fitch), was priced at 5.75% on the back of more than €3.4bn of demand, pre-reconciliation, following initial price thoughts of the 6.25% area, with the final book some €3.6bn.

“Investors want subordinated trades, they want duration, and insurance is perfect for that as it’s exactly what they offer,” said Bonnal, “so it’s no surprise that we are seeing more and that so many are going so well.”

Achmea’s RT1 was just the latest in a spate of insurance issuance, with French companies in particular having hit the market last week: Axa sold a €1.5bn dual-tranche trade, equally split between RT1 and Tier 2, on the Monday (13 October), with La Mondiale issuing €500m of Tier 2 the same day, and BPCE Assurances raising €280m in RT1 format and €400m in Tier 2 on the Thursday.

“If you look at Axa’s result, the reset is substantially lower than where they printed essentially the same deal with us in May,” noted Bonnal (pictured below), “so again we see the dynamic is very strong. Indeed, the dual-tranche trade was not necessarily planned for this year; they brought it forward because conditions have still been looking so good — especially when put in the context of the French situation.

“And it was interesting to see another French group, BPCE, externalising what would normally be internal debt between the insurance part and the bank parent.”

However, insurance supply is likely to be substantially lower in the coming two years, according to Bonnal, with the refinancing of grandfathered Tier 1 debt that has been driving the issuance nearing an end — Achmea’s RT1 was launched in conjunction with a tender offer for two outstanding subordinated issues.

Glass half full?

The largest European unsecured financials trade of the week was a 10 year green senior non-preferred benchmark for Svenska Handelsbanken on Thursday, a day after it announced Q3 results. Three hours after IPTs of mid-swaps plus 110bp-115bp were announced, pricing was fixed at plus 85bp for a €750m size on the back of books above €2.1bn, pre-reconciliation, with the final order book falling to €1.3bn.

Although the issuer faced order attrition of 38%, it came away with the tightest 10 year SNP pricing of the year in the pre-funding exercise on the back of a new issue premium put at just 2bp-3bp.

“That kind of spread is extremely tight on an historical basis,” said Bonnal. “Yes, you’re probably going to have faster hands looking for a higher NIP dropping out when you get to those levels, but it was impressive that they printed inside Rabobank’s 10 year green SNP from a few weeks ago at 87bp — we’re not at the sub-70bp spreads we saw in 2020 when rates were negative, but we’re not far away.

“To me, it demonstrates the mindset of issuers,” he added. “Handelsbanken is as tight as it comes, best in class, doesn’t have a lot to do in terms of funding programme, but chose to do this pre-financing. They see the value of locking in that kind of re-offer spread for longer tenors, and I wouldn’t be surprised if we continue to see that kind of pre-funding activity as banks exit blackouts in the next couple of weeks.”

Other banks are likely to see the glass as half full rather than half empty and adopt a similar approach, according to Bonnal.

“The volatility we’ve seen has been a bit of a wake-up call. When issuers see spreads going 5bp wider in a day, they are asking themselves if they are taking a risk by waiting for spreads to tighten 10bp.

“So while the consensus is still for spreads to tighten and it’s hard to see just what exogenous shock could substantially derail the market, issuers are getting a bit more pragmatic about the levels they can achieve in the current market.”

The Greek bank’s positive rating trend was demonstrated the previous Thursday (16 October), when Moody’s lifted its long term deposit ratings from Baa2 to Baa1, senior non-preferred debt from Ba1 to Baa3, and AT1 from B1 to Ba3 on the back of an upgrade to its Baseline Credit Assessment and Adjusted BCA from ba1 to baa3. The senior unsecured rating was affirmed.

Books for the new issue were opened on Thursday morning with initial price thoughts of the mid-swaps plus 120bp area for the €500m no-grow six year non-call five green senior preferred issue, expected rating Baa2. After around an hour and a quarter, the leads reported books above €1.5bn, and after around two hours and 40 minutes, the spread was set at 92bp on the back of books above €3bn, pre-reconciliation. The final book was above €2.5bn, with more than 140 investors involved, and the deal tightened some 3bp on the break.

Alpha Bank highlighted that the spread is the lowest achieved on a senior preferred bond by a Greek bank in the duration bracket.

“The successful pricing of the €500m green bond represents a strategic milestone for Alpha Bank, enhancing our funding flexibility to finance green and sustainable investments, while also confirming the confidence of international markets in our credit profile,” said Katerina Marmara, chief of global markets and group treasurer, Alpha Bank.

“The strong oversubscription, the participation of leading institutional investors, and the final pricing at a historically low spread for a bond of this type issued by a Greek bank, are additional factors that reflect the positive assessment of Alpha Bank’s strategy and steady growth trajectory.”

Antonios Tsiantas, FIG syndicate at joint bookrunner and green structuring bank Crédit Agricole CIB, said the transaction enjoyed several tailwinds that contributed to its success.

“This is the first investment grade and hence IG index-eligible bond by Alpha Bank,” he said, “and also their first green bond. Alpha Bank has the smallest outstanding curve in seniors among the Greek banks, so it has been an opportunity for investors to buy a name that is scarcer than its peers.

“Additionally, it is 26% owned by UniCredit and has a close partnership with them, which is seen as a stamp of quality from an international player, something that is again unique to Alpha Bank and further highlights their quality.”

These were among factors that gave the issuer and its leads confidence to proceed on Thursday morning, even if the market’s direction was not completely clear, according to Tsiantas.

“It turned out to be a positive day and it all came together extremely well to produce a fantastic trade,” he said. “The book was phenomenal in both size and quality.”

Asset managers were allocated 74% of the paper and banks 23%, while 84% was placed outside Greece.

“For the Greek banks overall,” added Tsiantas, “we’ve moved to the point where they are now considered pretty vanilla. The investors that had supported Greek banks during the hard, non-IG years now find them in general too tight, but their absence is more than compensated for by new real money buyers of IG paper that we tend to see in every other IG book across Europe.”

Fair value was seen around 90bp, based on Alpha Bank’s curve and extension out to the six non-call five maturity, and on the delta versus recent southern European supply, such as UniCredit and Banco BPM senior non-preferred issuances. The 92bp re-offer spread arrived at after 28bp of tightening from the 120bp area IPTs therefore equated to a new issue premium of 2bp.

“We had a peak book of €3bn and final book north of €2.5bn,” said Mattia Nobile, DCM at Crédit Agricole CIB (pictured below), “which is a modest attrition compared to some other recent trades, so Alpha Bank clearly outperformed. The ESG element helped a lot in this respect, because investors tend to be quite sticky when it’s a green bond, and in particular in this case where it is their first green bond, so a good opportunity for ESG investors to diversify.

“Overall, the trade is a clear vote of confidence from investors in Alpha Bank and the whole Greek bank universe.”

BNP Paribas, Crédit Agricole CIB, HSBC, JP Morgan, Morgan Stanley and UniCredit were joint lead managers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Zero attrition for CAA RT1 debut

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

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

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

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

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

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

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

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

February financials supply picked up where January left off this week, as banks approaching an undersupplied market encountered unsatisfied demand from investors finding enough reasons to buy, even if valuations remain stretched on some metrics.

Euro financials issuance (including secured) is down around 13% on the corresponding periods of 2023 and 2024. The decline would be more dramatic were it not for a 58% increase in senior non-preferred supply, with other asset classes experiencing falls ranging from 18% in senior preferred to 64% in euro AT1.

“Normally, when investors tell you they are disappointed, it means that performance was not there, but currently they are just disappointed because the supply was not there,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “The volumes that were anticipated have not materialised — and not only in financials, but also in corporates and SSAs.

“So all in all, they are simply starved of assets.”

As evidence of this, when senior euro issuance from European national champions returned in force yesterday (Thursday) after a quieter first half to the week, the €6.25bn of supply across the unsecured space was eagerly taken down.

“Supply had been slow given the US tech headlines, tariff talk and blackout periods,” said Antonios Tsiantas, FIG syndicate at Crédit Agricole CIB, “but with renewed macro tailwinds, the rally in rates and pent-up demand, yesterday’s trades were nothing short of blow-outs. There was minimal price sensitivity as books remained sticky throughout the last pricing iteration in most instances, while the outcomes were stellar, with zero to negative NIPs for all issuers.”

Svenska Handelsbanken raised €1.25bn with a senior preferred issue split into €750m three year floating and €500m fixed rate tranches that attracted more than €4.1bn of orders during bookbuilding, with pricing tightened from the 65bp area and 90bp-95bp, respectively, to as tight as 42bp and 68bp, a couple of basis points inside fair value in both formats.

Banco Santander extended out to 10 years for a €1.25bn senior non-preferred benchmark and attracted over €5.4bn of peak demand, allowing for tightening from the 150bp area to 120bp, flat to fair value and a new tight for the issuer, with negligible attrition.

“Some people have been sceptical about duration,” said Hoarau at Crédit Agricole CIB (pictured), “but Santander’s transaction demonstrates that there is no resistance towards duration in this market — if we have not seen many long dated deals, it is just because issuers were not ready to pay the extra basis points to print 10 years or longer.”

Deutsche Bank built the biggest book of the day, some €8.7bn for a €1bn six year non-call five senior preferred deal, with a starting level of the 160bp area proving eye-catching and the pricing being tightened 35bp to a re-offer of 125bp, again, flat to fair value.

UBS Group, meanwhile, raised €2.7bn in a two-tranche HoldCo trade in a follow-up to a $3bn dual-tranche US dollar Additional Tier 1 transaction on Wednesday. The Swiss bank attracted a whopping aggregate $22bn of demand for the $1.5bn perpetual non-call 5.5 and $1.5bn perpetual non-call 10 year tranches, with the pricing of each tightened some 75bp from IPTs and landing around 7bp inside fair value.

The strength of the US dollar FIG market overall has proven more than equal to its euro counterpart, with financials supply to this week up 9% on 2024, at $163bn, outpacing corporate supply down 19% year-on-year. Yankee financials issuance is up even more sharply, up 22%, at $60bn, with the rise driven by banks.

“Taking that into account, it’s very pleasing to see the development of the market, with the supportiveness of US accounts for Yankee transactions continuing to drive the success of many of these deals,” said Daniel Kim, director, US syndicate, at Crédit Agricole CIB. “Transactions such as UBS and BBVA Mexico (see separate article) yesterday provide ample evidence that investors remain very comfortable with bank capital instruments.

“The new administration here in the US is making it easier for banks to perform, with potentially less regulation,” he added, “and at the same time, most importantly, the credit story for banks individually and as a whole has been very positive, with earnings coming out very strong across the different facets of the industry. All that is certainly lending strength to the sector and driving the outperformance of banks within the financial space and versus corporates.”

While valuations have been considered toppish in many quarters for some time, there is little evidence that they are vulnerable, with varied factors supporting prevailing levels on top of banks’ creditworthiness.

“Recent conversations with real money investors confirms the main investment pattern is intact,” said Hoarau at Crédit Agricole CIB. “They are looking for alpha in higher beta instruments in an environment where assets are very expensive, net supply is negative, and liquidity abundant.

“Buyside accounts continue to dislike spreads, but to like the yield, despite the outright drop in rates: it is all about putting excess cash to work while optimising the carry. We live in an environment supported by rock solid technicals, where resilience to negative headline news is elevated.”

William Rabicano, director, credit trading at Crédit Agricole CIB (pictured), cited the market’s cool in the face of equity panic last week as evidence of this.

“The most telling day for me was Monday of last week (27 January) when the Nasdaq was down some 3% and we barely saw a seller of risk,” he said, “and as macro attempted to reverse, spreads were very quickly remarked tighter as people scrambled to cover shorts. And I could easily count on one hand the number of days we’ve gone home wider than where we started a day.

“Even at these valuations where you might expect buying to stutter and stall,” he added, “you can’t buy any bonds you want to and covering shorts is extremely difficult. And the need to finance buying of new deals by selling secondary paper has been non-existent.”

A continued pick-up in primary market supply is anticipated on the back of the strong technicals and as more banks emerge from blackouts, with few clouds on the horizon that could undermine the benign conditions.

The German elections on 23 February and S&P review of France’s rating are flagged by Neel Shah, financial credit analyst at Crédit Agricole CIB, but not deemed likely to cause any problems for issuers continuing to achieve strong results in the near term.

“It’s worth noting,” he added, “that French risk has been the clear outperformer at the start of the year, with investors much more confident in adding risk in the French space, where there has been only modest issuance. Any headline risk around the country on the political side has reduced quite sharply and is expected to remain subdued until mid-March.”

The strong technicals and momentum evident in primary and secondary dynamics are not, however, blinding market participants to the risk that the current scenario holds, according to Rabicano.

“It may get to the point where valuations are stretched and something in the macro market does crack,” he said, “and if that happens, we are susceptible to reacting quite negatively, quite quickly. So there certainly is a small note of caution out there, with people concerned about getting caught long at the tights.

“But at the same time, everyone can’t really look past the technicals.”

Indeed, the market could be on track to soar further, according to Hoarau.

“2025 has started nicely in FIG and there is a solid conviction that we are going to explore new pricing paradigms,” he said. “Southern European names will continue to surprise to the upside, the SP-SNP spread could compress further from an already small differential, and we could well see some first class names trading closer to the 100bp mark in Tier 2 soon.

“In AT1, the question is, when do we reach the 300 reset mark in euro primary?”

Following initial price thoughts of the very low 8s area, the benchmark — expected ratings Baa3/BB Moody’s/Fitch) — was priced at 7.625%, some 50bp inside the IPTs. The book experienced only modest attrition, declining from the $5.4bn peak to $4.9bn, and maintained its quality, according to Gordon Kingsley, MD, Head of LatAm DCM at active joint bookrunner Crédit Agricole CIB, allowing for the ultimate sizing of $1bn. The pricing, equivalent to US Treasuries plus 337.5bp, represented a minimal new issue concession, of around 7.5bp.

BBVA Mexico’s first US dollar transaction of the year, the Tier 2 deal followed a 15 non-call 10 last year and, in September, a five year senior unsecured trade that provided a reference point for relative value analysis on the new 10 non-call 5 issue.

The Mexican bank had four series of 15 non-call 10 Tier 2 securities outstanding and the shift in structure offered diversification in tenor for the targeted investors, while fitting into BBVA Mexico’s curve, which has Tier 2 call dates in 2028, 2029, 2033 and 2034.

Jon Gray, MD, DCM Americas at Crédit Agricole CIB noted that, for Mexican banks, Tier 2 represents the most cost effective way of satisfying TLAC requirements.

“With this transaction, BBVA Mexico is maintaining its comfortable Tier 2 level, allowing the institution to keep growing its portfolio without capital constraints,” he said.

“The new issue,” added Doncho Donchev, executive director, DCM Solutions at Crédit Agricole CIB, “puts BBVA Mexico in a comfortable position to comply with TLAC requirements that will become fully phased-in at year-end 2025.”

BBVA Mexico’s TLAC ratio was 18.7% as of Q3 2024, versus its phased-in TLAC requirement of 16.875% as of year-end 2024 and expected final TLAC requirement of around 18.5%.

The BBVA group follows a Multiple Point of Entry resolution strategy, meaning that in the case of failure, each subsidiary and the Spanish/EU operations will be subject to separate resolution measures.

It is in this context that BBVA Mexico has been regularly issuing Tier 2 bonds to external investors since 2014. At the same time, the Tier 2 transaction is recognized for consolidated capital at group level, subject to certain haircuts.

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

Additional Tier 1 issuance is nearing its biggest yearly total after a bumper 16 benchmark trades from European financial institutions in the space of a month, with issuers taking advantage of buoyant conditions to pre-empt upcoming calls and supply providing insights into behaviour around par call structures.

The 15 September benchmark AT1 deals for around €12.6bn-equivalent across euros, sterling and US dollars lifted year-to-date issuance to around €36.5bn, with Commerzbank adding $750m (€672m) on Tuesday of last week (1 October). This compares with around €26bn in the whole of 2023 and is only around 10% shy of the record set in 2014 when AT1 issuance was initially ramped up.

Momentum continued through September after a lightening start in the first week of the month (see previous BIHC Briefing), the peak marked by a $800m perpetual non-call 7.5 trade from Nordea on 19 September — the day after the Federal Reserve delivered its first rate cut, and in size, cutting by 50bp rather than 25bp. The Scandinavian bank’s deal was priced with a 6.3% coupon, some 20bp through fair value and tightened from initial price thoughts of the 7.125% area on the back of $11.5bn-plus peak and $6.8bn-plus final books.

Doncho Donchev, executive director, DCM Solutions, Crédit Agricole CIB, cites four factors as driving the financial institutions’ AT1 issuance.

“Cash rich investors have been swarming new AT1 issues for the high coupons they offer in anticipation of falling rates,” he said, “with the Fed delivering the big one after the ECB and Bank of England had taken their first steps.

“Then there is the fear of the US election — not so much who wins, but what happens if it is a contested election that creates volatility and closes the market? And let’s not forget residual fears of a recession — everyone is talking about a soft landing, but what if we have a hard landing?”

Finally, notes Donchev, some €36bn of AT1 call dates are scheduled in 2025 across euros, dollars and sterling, making it the biggest ever year in this respect, as calls under various perpetual non-call five, non-call seven and non-call 10 structures coincide for the first time. Institutions such as Deutsche Bank, Intesa Sanpaolo and UBS have as many as three AT1 call dates next year.

Too far, too fast for some

Nordea’s AT1 transaction was one of eight new issues (nine tranches in total, with HSBC issuing dual-tranche) in US dollars from the beginning of September to Commerzbank’s on 1 October, totalling $11bn.

The market’s direction was evident from the Nordic perp non-call 7.5 deal’s coupon of 6.30% being more than 1% inside that of an, admittedly longer dated, perp non-call 10 from BNP Paribas just 16 days earlier, on 3 September, with AT1 yields and spreads collapsing much faster than moves in underlying US Treasuries. The attrition evident in Nordea’s book, with 40% of orders by volume dropping, suggested the market had moved too far, too fast for some accounts.

Conditions nevertheless remained ripe, with Crédit Agricole selling its first dollar AT1 since January 2022 on 24 September. The French bank approached the market on the back of consistent reverse enquiries and following a non-deal roadshow across the US and Asia, going out with IPTs of the 7.25% area for a perpetual non-call 10 trade. After the order book peaked at $9.1bn, the deal was sized at the maximum targeted $1.25bn size on the back of a comfortable final oversubscription and priced at 6.70%, with a reset margin of SOFR plus 359.6bp, more than 50bp better than achieved on recent issuance from Crédit Agricole’s peer group.

The issuer was nonetheless mindful of investor sentiment, according to Donchev.

“While it attracted some investors that many European issuers can only dream of, high quality buy-and-hold accounts including some insurance companies and pension and sovereign wealth funds,” he said, “some investors were price sensitive from the start, while some classic AT1 investors simply dropped. In this market, you have to be aware that there can be some investor reticence and not squeeze too aggressively.

“We are seeing barbell distribution, with the top 10 to 20 accounts taking the lion’s share of AT1s,” added Donchev (pictured), “then hundreds of smaller investors with small allocations, and some trading accounts. Execution is still tied to the large specialist funds — issuers can afford to lose one or two, but beyond that a deal may come apart.”

The book for a $1bn perp non-call seven issue for Lloyds Bank two days later peaked at some $5.25bn, with pricing tightened from the 7.125% area to 6.75%, while Commerzbank’s $750m perp non-call 6.5 was tightened from the 8% area to 7.5% on the back of peak $5.25bn-plus and final $4.2bn-plus books.

The German bank’s deal came amid takeover talk, with UniCredit eyeing Commerzbank, and after it had sold a €750m 7.875% perp non-call 2032 AT1 in June. Commerzbank noted that the pricing of the new dollar issue was substantially inside comparable euro funding levels.

Par calls: theory versus practice

As well as providing welcome opportunities for issuers and investors alike, the AT1 wave offered clues as to how so-called “par calls” are being viewed and used by each side of the market.

The par call feature of hybrids separates the first call date and first reset date — typically by six months for AT1s and three months for Tier 2s — with issuers able call the instrument at par at any time during the intervening period. Issuers thereby have additional flexibility on the replacement of capital instruments and it allows for a reduction in the potential cost of carry.

But as par call periods approach, the difference in returns realised by investors if the bond is valued to the first or last possible call dates diverges greatly. Investors meanwhile have to track the varied documentation of different issuers, including coupon resets and call frequency after the first call date.

After being introduced and widely used in the corporate space, the par call feature began being used in the banking and insurance sectors in 2019, so — with the earliest par call date being five years — it is only now that evidence of how bank issuers would use them in practice and how investors would position themselves has been emerging.

With investors typically valuing AT1s to the first possible call date at the start of the par call period, their interest lies in issuers exercising calls at that point.

Among smaller or infrequent issuers with lower AT1 amounts outstanding, the question of how the par call feature would be used in practice has now been answered via a few concrete cases: Ireland’s AIB and Bank of Ireland, as well as Iceland’s Arion, launched new issues alongside tenders for their outstandings well in advance of the opening of their par call periods in late 2024 and 2025.

“The feature sounded nice in theory,” said Donchev, “but in practice these banks have not used the feature so far. And not only did these banks not use it, but they gave a very clear feature to investors that they wanted to refinance their AT1 bonds in advance.

“This could have been simply a function of the very attractive market,” he added, “but I expect investor pushback was a factor, too, with these banks requiring regular access to the capital markets, even if they are not the largest.”

Among bigger players, the first issuers with par call periods approaching, in December, have also pre-empted par call periods: Nationwide Building Society issued a £750m (€890m) 7.5% perp non-call 6.75 on 9 September ahead of compatriot Lloyds’ dollar AT1. This has heightened anticipation that the two will call their outstanding issues at the first opportunity, with Lloyds’ action more eagerly awaited as it is one of the few banks not to have called an AT1, in May 2020 amid the impact of Covid.

When push comes to shove

With par calls having yet to serve their theoretical purpose — not to mention the complications of appropriately hedging AT1s incorporating the feature — some issuers have decided to dispense with them in their latest new issues.

Having previously included par calls in recent AT1 issuance, ING Groep and KBC dropped them from $1bn 7.25% perpetual non-call 10 and €750m 6.25% perp non-call seven trades on 5 and 10 September, respectively, as did Crédit Agricole and Lloyds from their new issues. Alpha Bank meanwhile reduced the par call period from six to three months as a mitigant to investor concerns. However, UBS introduced a six month par call for the first time, on a $1.5bn 6.85% perp non-call 5.5 on 5 September.

Other issuers to have previously included the feature retained it, while ABN Amro and BNP Paribas, in line with their previous AT1s, continued without par calls in their euro and dollar deals that reopened the respective markets.

“Because of a combination of hedging issues and how the par call has developed in practice, some issuers have not included them,” said Donchev, “and have used this as a marketing feature for their new issues, aware that there has been verbal pushback from some accounts. However, while investors may be happy with the lack of par calls, there has been no discernible impact on the outcome of the trades.

“Has it affected the book quality, oversubscription and the performance of deals? Absolutely not. When push comes to shove, demand is a function of where the market is, how investors see relative value, and how much money they can make.”

However, Donchev notes that investor feedback suggests they may reassess the way they view and calculate returns for AT1s with par calls should a major bank decide to make use of the par call period.

The next test case on the horizon is Intesa Sanpaolo, which has a €400m 5.875% AT1 with a first call date of 20 January 2025 and first reset date of 20 June 2025.

Another technical development in AT1 supply has been the first Yankee issuance with SOFR-based resets, rather than US Treasury-based resets. UST-based resets had been the norm for dollar AT1s with the phasing-out of Libor, but the emergence of the reliable SOFR-based swaps curve in the past couple of years has allowed issuers such as Crédit Agricole, ING and UBS to use it as the basis for resets in their new transactions.

Having a SOFR-based reset avoids basis risk versus Treasuries for issuers using swaps to switch from fixed to floating coupons, while investors have cited easier comparisons of such dollar AT1 with euro equivalents as an advantage of the development. Recently the difference between SOFR-based resets and UST equivalents has been some 60bp.

The tender and new issue were announced on Tuesday morning, the French insurer offering to buy back 4.25% perpetual non-call January 2025 and 4.50% perpetual non-call October 2025 subordinated paper, of which €620m and €630m, respectively, are outstanding.

Crédit Agricole Assurances (CAA) previously targeted the same two Tier 1 notes in October 2023, buying back €500m in aggregate of the originally €1bn and €750m deals.

Crédit Agricole CIB — global coordinator, sole structuring bank and dealer manager, and sole bookrunner — went out with initial price thoughts of the mid-swaps plus 235bp area for the new December 2034 bullet Tier 2 note with a six month par call, expecting rating BBB+ (S&P). A euro benchmark was announced, with a €750m size targeted.

After around two-and-a-quarter hours, books exceeded €1.5bn, and after around three hours and 50 minutes, the size was set at the expected €750m and the spread at 200bp on the back of books above €3bn, pre-reconciliation. The deal attracted further demand, with the final book good at re-offer above €3.4bn, while the bond yielded 4.504%.

“At the end of the day, we had a very strong book,” said André Bonnal, FIG syndicate at Crédit Agricole CIB (pictured). “There was a clear inflection point at 200bp — pricing through would have meant strong book attrition and leaving a bad taste with investors, which was something the issuer was keen to avoid. When investors were offered what they were looking for, i.e. 200bp, the book not only held together very well, but actually increased.

“The 4.5% yield for 10 years is something that is also very much appreciated by investors,” he added, “and while keen on getting down to the 200bp level, CAA was also happy to be able to get close to that. So we struck the right balance between getting the right trade for the market, offering a bit of performance, and delivering for the issuer.”

He put the new issue premium at up to 2bp. CAA’s outstanding €500m 5.875% October 2033 bullet Tier 2 — issued alongside last October’s tender — was seen at 190bp on an i-spread basis, and Bonnal said that, with the curve worth 5bp-10bp, the new issue premium was only around 2bp — or even less based on a steeper curve, as assumed by some investors, who were hence willing to buy around flat to fair value. Some new financial institutions issuance this week achieved flat to negative new issue premiums, but he noted that these were typically in senior format and at the shorter end, and also in some cases widened after pricing.

With CAA’s last Tier 2 having recently underperformed slightly versus names such as Axa and CNP Assurances, the spread also represented an interesting entry point for investors, added Bonnal. CNP’s 2054 non-call 2034 Tier 2, issued in July, for example, was quoted at 210bp, and the bullet-callable differential is worth around 25bp, according to Bonnal.

“This also has the best rating-yield combination of any offering from the Crédit Agricole group,” he noted, “outside AT1, which is a different animal. And it helped that we offered some duration, which the other parts of the group have not done for some time.”

Crédit Agricole SA’s 2036 non-call 3031 Tier 2, issued in April, was seen at 174bp.

CAA’s new issue attracted strong demand from French insurers, according to Bonnal, but also large UK asset managers in size.

“I think that speaks for the attractive entry point,” he said, “and investors not shying away from loading duration and French risk in spite of the political backdrop.”

A maximum acceptance amount for the tender of €750m was set after the sizing of the deal at that magnitude. Soft priority allocation in the tender was available to investors placing orders for the new issue.

The tender offer runs until Tuesday, with the results scheduled to be announced on Wednesday.

Bonnal noted that while an inaugural Restricted Tier 1 from CAA would have been warmly welcomed by investors, the issuer had no need to print RT1.

“They still have plenty of space in their Tier 2 bucket,” he said, “and while an RT1 would work very well in this market, it is still at least 175bp back of where the Tier 2 priced.”

Despite its NIP having been close to zero, CAA’s Tier 2 was trading 10bp inside re-offer in the secondary market on Friday, making it one of the best performers of the week’s new issues.

Allianz return ‘outstanding’

Allianz had the previous Tuesday (27 August) targeted the US dollar market for a benchmark Tier 2 transaction, issuing a $1.25bn (€1.12bn) 30 year non-call 10 note on the back of a final book above $8bn.

Following IPTs of the 6.125% area, pricing on the September 2054 non-call September 2034 issue, expected ratings A1/A+ (Moody’s/S&P), was ultimately tightened in to 5.60% — versus fair value of around 5.625% — on the back of peak demand of some $10.75bn.

The German insurer hit the market around the first anniversary of a similar, $1bn 30 non-call 10 Tier 2 issued at 6.35% on 30 August 2023, which also came just before Labor Day.

“By doing so, they had the entire market to themselves,” said Daniel Kim, director, US syndicate, at Crédit Agricole CIB, “and came away with an outstanding transaction. They were around 6.5 times covered and were able to move over 50bp from IPTs.

“It came on the heels of last year’s success,” he added, “so investors were comfortable with the structure, and it’s clearly a global brand name and very strong credit. There had been a dearth of supply in that part of the curve while many pension funds, life insurance funds and longer duration real money managers were looking for such paper, in a market that is favouring beta products.”

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

The stars aligned for Additional Tier 1 issuance across US dollars and euros this week, as surging demand from investors seeking yield and duration post-Jackson Hole enabled financial institutions to achieve size, duration and price on subordinated offerings.

The momentum across bank asset classes witnessed in the last week of August only grew into the first week of September, with AT1 joining the menu alongside Tier 2 and senior unsecured debt to tap into a wall of buying.

“Credit markets are super-strong,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “Central banks are aligned and moving in the right direction, and we continue to have the combination of excess liquidity and carry, so conditions are extremely favourable.

“This amount of new AT1 issuance in a given week is unprecedented.”

The supply onslaught came just over a week after Federal Reserve chair Jerome Powell primed the market at Jackson Hole (pictured above) on 23 August by declaring: “The time has come for policy to adjust.”

Daniel Kim, director, US syndicate, at Crédit Agricole CIB (pictured), said that while several factors are supportive of the strong market, the Fed’s pivot was the catalyst for conditions becoming quite so conducive.

“Whether it’s a 25bp or 50bp cut on 18 September, investors know which direction yields are going in,” he said. “And when you are speaking about the global economy, and especially the US, we’re not in a recession and overall there are no real credit concerns at play.

“It’s what bondholders wanted to see,” he added, “and they are now looking to put dollars to work and add duration. That drive to be invested is what has made for such a positive environment.”

Investment grade inflows in both dollars and euros have surged of late, while the macro news triggered the release of pent-up demand.

The exuberant conditions were most evident in the dollar market, where $5bn of AT1 issuance from four issuers attracted an aggregate $50bn of orders amid more than 50 financial trades in the post-Labor Day window from Tuesday onward.

“It’s maybe only a handful of deals that were AT1s,” said Kim, “but that’s a lot in such a concentrated timeframe. The pipeline had been growing for some time and, being a high beta instrument with typically the highest yield available, in such a bond-bullish, credit positive market, it’s the product that is probably going to get the highest subscription globally.”

BNP Paribas opened the deeply subordinated issuance on Tuesday with the first AT1 for a Yankee bank since July, going out with initial price thoughts of the 8% area for a perpetual non-call 10 transaction. Peak demand of some $10bn allowed a $1bn (€900m) trade to be priced at 7.375%, implying zero new issue premium, while the reset spread was 353.3bp.

A $2.5bn dual-tranche, perp non-call 5.5 and perp non-call 10 AT1 for HSBC on Wednesday then attracted combined orders above $20bn, allowing the bank to tighten pricing from IPTs of the 7.625% for both tranches inside 7%, with pricing of 6.875% and 6.950%, respectively, for $1.35bn and $1.15bn tranches. Again, no new issue premiums were apparent on the hybrid offerings.

“The new issue concessions were typically negligible,” said Kim. “It’s almost as if secondaries weren’t a concern to investors, with the outright demand for a 7% or higher yield — albeit ultimately in the 6s for HSBC — being all they were focused on. That was reflected in the order books, and enabled issuers to go long, with the flatness of the credit curve meaning that reset spreads were tighter than expected.

“So while we had expected strong issuance, the moves they were able to make from IPTs to final pricing surprised to the upside. And when those deals came out and went so well, we saw further issues hot on their heels — demand begat more demand, with investors going aggressively into subsequent issues after missing out on the allocations they wanted.”

Indeed, ING and UBS hit the market on Thursday, the Dutch group tightening pricing from 7.785% to 7.250% on a $1bn perp non-call 10 that attracted some $8.4bn of orders, and the Swiss bank issuing a $1.5bn perp non-call 5.5 on the back of some $13bn of demand and tightening pricing from 7.50% to 6.85%.

Contributing to the dollar market’s strength and volume outperformance versus euros were economics continuing to favour the US market: BNP Paribas’s 7.375% perp non-call 10 issue was equivalent to around 6% in euros, some 40bp inside what it could have paid in its home currency.

The euro market nevertheless enjoyed its own landmarks.

ABN Amro on Monday reopened the euro AT1 market with a €750m perp non-call 10 issue priced at 6.375%, the lowest coupon on an AT1 in any currency since March 2022. The Dutch bank tightened pricing from IPTs of the 7% area and attracted a book of some €4.75bn, with the reset spread ultimately 390.2bp.

“Issuers are happy to tap the AT1 market given the attractive reset spreads,” said Hoarau (pictured), “which are much lower compared on an historical basis. Most core European issuers could issue in euros well inside the critical 400bp mark.”

The euro AT1 market proved interesting to a wider range of issuers, with Bank of Ireland and Greece’s Alpha Bank on Tuesday printing €600m and €300m perp non-call six deals, respectively.

The Irish bank tightened from 7% to 6.375% — matching ABN Amro but with a shorter duration — on the back of some €2.85bn of demand to achieve pricing some 12.5bp inside fair value. The new issue was launched in conjunction with a tender for up to €600m of its outstanding €675m 7.5% perp non-call 2025 issue.

Alpha Services & Holdings attracted some €2.7bn of orders to its €300m perpetual non-call six AT1, allowing it to tighten pricing from IPTs of the 8% area to 7.5%. The outcome compares with 11.875% on its last AT1, a €400m perp non-call 5.5 sold in February 2023, reflecting sharp improvements in the Greek bank’s profile.

“In terms of jurisdictions, the market has fully reopened,” said Hoarau. “In the first post-summer days, it was only about core markets, core issuers and national champions, but now we are seeing almost everything working well.

“Demand is sticky in bookbuilding and book attrition limited.”

Indeed, as in the dollar market, primary market execution has often exceeded expectations, whether in AT1 or the accompanying flurry of Tier 2 and slew of senior non-preferred issuance.

“It was quite clear to us that there was ample cash stored on the sidelines ready to go to work,” said William Rabicano, director, credit trading at Crédit Agricole CIB, “and that has certainly been the case — the deals we’ve seen so far have been very well received, books have been pretty good and new issue concessions have been all but zero. So in that respect, the market has panned out like we imagined.

“But I don’t think many people anticipated the sort of outright strength that we’ve seen,” he added, “such as going straight back to 52 on main, 285 on crossover, and equity markets being back to year-to-date highs. So valuations have maybe caught people off guard.”

Secondary levels have also held up well in the face of the fresh supply.

“In spite of the deals that we’ve seen pricing at almost fair value in the last two weeks, we’ve not seen clients selling paper in secondary — they’ve just been adding more risk in the primary market,” said Neel Shah, financial credit analyst at Crédit Agricole CIB. “That’s another signal that client cash balances remain very strong and that they are still determined to participate in primary, despite valuations not offering very much by way of new issue premium.

“And investors are clearly quite comfortable owning financials despite the market volatility that we’ve experienced over the last few months.”

The current lure of AT1s helped them outperform the latest senior non-preferred issuance this week when a sell-off in US equities led by chipmaker Nvidia led to weakness on Wednesday, which was quickly overcome by another wave of supply.

The incident was just the latest example of the credit market’s ability to withstand bouts of macro volatility, most starkly exemplified by the rapidity with which it recovered from the 5 August equity sell-off sparked by a Bank of Japan rate hike and signs of a US economic slowdown. After VIX peaked at levels higher than those witnessed upon the collapse of Lehman Brothers, the market soon returned to business as usual.

“It’s all about liquidity,” said Hoarau. “That’s why any phases of correction are short-lived. After a couple of days, everyone realises that it doesn’t make sense to buy protection; you’d rather be invested until things really crack, plus the carry is a very strong protection in case of spread widening.

“And people remind themselves that, if something really bad would happen, central banks would step in.”

However, he suggests the episode shows an underlying nervousness in markets, and Rabicano (pictured) agrees that, with valuations optically very tight, vulnerabilities exist.

“If we were to see any shocks to the system, we could see a decent repricing wider, and I don’t think many people would stand in the way of that straight away,” he said. “And although technicals remain supportive, we’ve had a fair amount of issuance so far at the start of September, so cash balances will start to diminish.

“That would be my only concern, because, as we all know, that cash usually gets fully put to work just as the market decides to turn around completely so those technicals can evaporate very quickly.”

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

Trepidation showed signs of turning into capitulation on Friday as dislocations began to crystalise in the face of the surprise French election, which overshadowed encouraging reactions to US data and the latest FOMC meeting to all but shut down new issuance from European banks and threaten ongoing disruptions.

Fears that French president Emmanuel Macron’s general election gamble could lead to a first government of the far-right Rassemblement National (RN) and accompanying fiscal and economic uncertainty sparked a widening in the Bund-OAT spread from inside 50bp beforehand to as wide as 77bp on Friday.

A resistance level of 75bp that had previously held when Macron defeated RN (under its prior Front National guise) candidate Marine Le Pen in 2017 was thus broken, upon opinion polls showing that the tables have turned — with the populism of the only other contender, the leftist Front Populaire coalition that is also ahead of Macron’s party, similarly feared.

The widening accelerated into Friday, prompting French agency Sfil to postpone a new long five year green bond that it had announced just the previous day.

“Thursday and Friday showed early signs of capitulation, with investors derisking portfolios and recalibrating hedges,” said Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB. “We can’t deny that the premium investors are demanding to own French government bonds or French credits has swollen, with evidence of contagion and new macro trades — in the second half of the week 10 year OAT yields did not move much, same for BTPs, but the 10 year Bund yield fell 25bp with the resurgence of flight-to-quality trades.

“Hopefully we find a catalyst for stabilisation soon,” he added, “otherwise I fear it will not be long before we see a three-handle Bund-OAT spread. The status of France within the Eurozone and capital markets, and growing concerns evident among big French real money investors make the situation serious indeed.”

See page 3 for fuller analysis of RN’s potential impact.

Some French banks’ non-preferred senior bonds were some 20bp wider on the week on average, their Tier 2s 30bp-35bp wider, and AT1s 50bp wider, while the CAC-40 turned negative for the year (compared to around 8% up for the DAX).

“The prospect of two populist blocs from far right and left having the majority in the National Assembly in a matter of weeks is monumental,” said Hoarau (pictured), “and could further hit French credit spreads and French investor appetite for risk assets.”

The impact on the wider market was reflected in the iTraxx Crossover index widening 40bp, including a 22bp move on Friday alone, which represents its biggest one-day move since Credit Suisse. And while traders had been marking spreads wider on few flows earlier in the week, talk of a sell-off emerged.

A small mercy for French banks is that, after heavy front-loading like their peers, most have completed more than three-quarters of their planned funding programmes for the year. However, with potential catalysts for improvement before or upon the French result difficult to identify, primary market conditions could prove prohibitive through to the traditional summer break.

“The market is not closed,” said Hoarau, “and as soon as markets settle down with less instability, issuers, particularly corporates, may well force through trades at some point before the election and it would only be reasonable to try to do so — pay a generous new issue concession and get a deal done rather than wait and potentially pay a bigger premium on a wider secondary market.

“But we have now entered unchartered territory and it is debatable whether such opportunities will arise very soon.”

The French turmoil came just as prospects for a US soft-landing and smoother rate path otherwise promised to see credit markets improve. After US CPI finally came in lower than expected on Wednesday, Federal Reserve chair Jerome Powell, leaving rates alone, struck a balanced tone, with the latest dot plot implying one rate cut this year versus one to two priced in by the market.

The 10 year US Treasury yield fell some 15bp in response, and although the first rate cut from the European Central Bank last week was accompanied by a slightly more hawkish narrative, this gave little cause for concern.

“Outside of the French election — which nobody saw coming — the market was pretty much setting itself up for a summer grind,” said William Rabicano, director, credit trading at Crédit Agricole CIB. “Investors are still long liquidity and cash, and while spreads were a little expensive given that markets have gone in a straight line for six months, they weren’t wildly out of sync.”

Le déluge avant…

Banks had taken advantage of the positive momentum to successfully issue capital instruments upon exiting blackout periods in early May, with both Santander and Erste Group selling AT1 on 7 May.

At €1.5bn, the Spanish bank’s perpetual non-call six new issue was the biggest single-tranche AT1 in euros since it sold a similarly-sized deal in January 2020. Pricing was tightened from the 7.375% area to 7%, deemed to represent a new issue premium of up to 37.5bp, while the book peaked around €4bn and ended at €3.6bn, with some 260 accounts involved.

The 7% coupon is the highest among Santander’s euro AT1 and it came with a higher reset spread than its 4.75% non-call March 2025 AT1, for which a tender was launched alongside the new issue.

“The exercise clearly caught the market by surprise,” said Neel Shah, financial credit analyst at Crédit Agricole CIB (pictured). “That an issuer who has previously been quite stringent about economic calls would take such an action was positively received by the market, and AT1 spreads gapped about 15bp-20bp tighter in response.”

The refinancing cost was meanwhile deemed negligible and the level perceived as investor-friendly.

Erste also sold its €750m perpetual non-call 7.4 AT1 in tandem with a tender for an outstanding, €500m 5.125% non-call 2025, AT1, and was able to tighten from the 7.625% area to 7%.

A week later, on 13 May, Intesa Sanpaolo hit the same 7% coupon level on a €1bn perpetual non-call eight AT1, tightening pricing from the 7.5% area on the back of some €3.75bn peak demand and paying a new issue premium in the single-digits.

Deutsche Bank then achieved the biggest book in the series of euro AT1, attracting some €9bn of orders to a €1.5bn 8.125% perpetual non-call 5.8, tightening from the 8.75% area but also paying a chunkier NIP of up to 37.5bp.

The market’s peak was marked by a €750m perpetual non-call seven AT1 for BBVA on 4 June. Although the Spaniard tightened from IPTs of the 7.375% area to achieve a coupon inside 7%, of 6.875%, the book dropped from a peak of around €3.4bn to around €1.15bn.

NatWest and DNB had meanwhile turned to the US dollar market for $1bn (€930m) and $700m, respectively, of AT1 on 7 and 23 May. The UK bank opted for a perpetual non-call 10 structure and tightened pricing from the 8.75% area to 8.125%, while the rare Norwegian perpetual non-call 5.5 fully IG AT1 attracted some $3bn of orders, allowing DNB to tighten from the 7.875% area to arguably inside fair value at 7.375% in its first dollar AT1 since 2019.

“They are basically the only issuer of AT1 in Norway,” said Mateen Ahmad, executive director and FI trader at Crédit Agricole CIB, “and are seen as a very safe pair of hands. The deal is a core holding for a lot of investors, and interestingly they saw a lot of take-up in the US, not just Europe.”

The strong AT1 supply was accompanied and indeed pre-empted by brisk Tier 2 issuance, with Bank of Ireland kicking off the month’s activity on 2 May with a €500m 10.25 non-call 5.25. On the back of some €3.4bn of orders, the Irish bank was able to tighten pricing from IPTs of the 220bp area to 185bp, implying a negative new issue premium.

Nordea set a high water mark for Tier 2 on 21 May, taking advantage of a peak €3bn book and final €2.7bn book to tighten pricing for a €750m 11 non-call six from IPTs of the 170bp area to 135bp — the tightest spread on a euro Tier 2 since 2021, although one Commonwealth Bank of Australia was able to match the following day on a €1bn 10 non-call five Tier 2.