BGC Group announced the move today (27 January). The enhancement provides clients with an FCA regulated reference page, improved data quality, and a strong alternative benchmark solution for their issuance activities, it said, with the wider range of approved products strengthening BGC’s value proposition and ability to support issuance workflows.

“This registration enables us to provide clients with regulated benchmark reference data that supports valuation and risk management activities across key rates markets,” said Nadim Mourad, Executive Managing Director at BGC.

The global brokerage and financial technology company’s approved benchmark offering includes swaps pricing in EUR IRS, GBP IRS, and XCCY swaps, and EU and UK inflation swaps.

“We are pleased to become a registered benchmark administrator in the UK, reflecting our commitment to the highest standards of benchmark administration and our dedication to integrity, transparency, and resiliency for our clients,” said Sean Windeatt, Co-Chief Executive Officer at BGC. “We look forward to expanding our benchmark offerings into other products and markets.”

Reference pages for its swaps products are available on Bloomberg and LSEG.

In the wake of the FOMC’s 20 September unexpectedly hawkish pause, the US market had suffered rates volatility compounded by bearish equity market undertones, prompting some financial institutions to hold off executing potential deals at the start of the week.

However, Crédit Agricole SA (CASA) proceeded with its first senior non-preferred (SNP) transaction in dollars since 2021, a six year non-call five benchmark with an anticipated size of $1bn-$1.25bn but to be sized appropriate to demand.

Daniel Kim, director, US syndicate, at sole bookrunner Crédit Agricole CIB in New York, said that among factors giving confidence to proceed with the deal was the scarcity of SNP issuance from the French bank, which is also not expected to issue in size before year-end given that ahead of the deal it had already raised some €23bn of a recently-upsized €25bn programme for 2023.

The bank also saw a window of stability in rates on Monday morning, while cognisant that the headwinds facing the market could increase — the possible US government shutdown over the weekend was looming, while this Friday sees the latest employment report released ahead of a long weekend taking in Monday’s Columbus Day holiday.

“We knew that the opportunities out there would be somewhat limited,” said Kim, “so we had to take leadership and strike when the opportunity presented itself.”

Drawing comfort from a positive start to an APAC-focused Korea Land & Housing dollar bond it was already working on, Crédit Agricole thus entered a quiet market alongside a two year senior deal from ANZ, with initial price thoughts of the Treasuries plus 200bp area for the October 2029 non-call October 2028 Reg S/144A US dollar benchmark, rated Aa3/A+/A+.

By the New York open, the bank had received a higher than expected $1.4bn of indications of interest from Asian, European and Middle Eastern accounts. Further demand prompted the issuer to accelerate execution and communicate 170bp “the number” pricing and an upsized $1.5bn-$1.75bn range. The deal was ultimately sized at $1.75bn (€1.64bn) with a final order book of $5.9bn and 153 investors allocated bonds, 81% to the US, 12% to Europe, and 5% to Asia.

“Typically a transaction like this would come in the context of $1bn-$1.25bn,” said Kim, “but the astronomical order book behooved us to somewhat appease some of those investors’ needs.”

The pricing move of 30bp from IPTs was larger than typically witnessed on recent Yankee supply, reflecting the strength of demand, but also the lack of visibility on CASA SNP levels, given its absence from the dollar market in the format. The new issue concession was put at around 5bp, while the premium versus equivalent euro funding was put at around 8bp, understood to be the lowest achieved by an EU bank in SNP format this year.

Kim noted that the deal had tightened to 165bp by mid-week against a backdrop of continued volatility and weakness, maintaining the French bank’s track record of appropriately-sized and priced and well-performing dollar issuance.

“It sets the stage for increased opportunistic US dollar issuance across the capital structure,” he added.

On the first trading day of the year (4 January), Toronto-Dominion Bank kicked off senior preferred/OpCo supply and Sumitomo Mitsui Financial Group senior non-preferred/HoldCo with $3bn (€2.46bn) and $2.5bn of issuance, respectively. The Japanese issuer’s TLAC-eligible deal was split into four tranches, including a $500m three year green bond jointly led by Crédit Agricole CIB, and attracted more than $12.1bn of orders, allowing for pricing inside fair value.

AT1 and Tier 2 dollar issuance the next day alone exceeded such supply in euros across the first three weeks of the year, Standard Chartered selling a $1.25bn AT1 on the second trading day of the year (5 January) and National Australia Bank and Crédit Agricole issuing $1.25bn and $1.5bn Tier 2s, respectively.

The French bank’s 20 year bullet 144A/Reg S trade highlighted the savings available versus euros, coming some 20bp-25bp inside where a comparable euro trade might have been priced, after pricing was tightened from IPTs of the 140bp over Treasuries area to 110bp on the back of $4.6bn of orders good at re-offer. While dollar AT1s have previously offered arbitrage versus euros, this has now spread to more senior parts of the capital structure.

“The Yankee bank space has been really active in dollars,” said Fadi Attia, managing director, US dollar FIG, at Crédit Agricole CIB. “That’s a function of significant buyside liquidity and the fact that for much of last year the funding levels in euros for many of the Yankee banks were more competitive than in dollars, whereas this year there’s a material funding cost saving that issuers can extract by taking funding out of dollars and swapping back to euros.

“This has been mainly driven by the strong relative outperformance of US dollar paper relative to euros on the secondary market coupled with the stable cross-currency basis.”

The strong demand was most evident in Standard Chartered’s $1.25bn perpetual non-call 10 issue, which reopened the AT1 market for the year. It attracted some $11.2bn of orders, allowing for pricing to be tightened from the 5.5% area to 4.75%.

“The deal was well received,” said Attia (pictured), “and their ability to extend their non-call curve out to non-call 10 speaks to how robust the market is in that space.”

While international banks approached the dollar market ahead of entering blackouts, US banks hit the market after the reporting season began on 15 January, with Wells Fargo kicking off supply on Tuesday (19 January) with a $3.51bn pref share issue. A book of some $9.2bn allowed pricing to be tightened from the 4.375% area to 3.90% for the perpetual non-call five transaction.

“The Wells Fargo deal is another clear example that speaks to the fact that there’s a wall of cash chasing subordinated product,” said Attia. “You also see that in the Tier 2s, whether it’s the 20 year Tier 2s that CASA and BNP Paribas have done or the NAB with an inverted credit spread curve.”

As the cross-currency basis moves in favour of dollars, the attractions of the market for issuers will continue, particularly in the bank capital segment, according to Attia.

“Demand is holding up in spite of the sell-off in US Treasury rates,” he said. “Whereas investors tend to shy away from adding AT1 during volatility in equities and rates, we haven’t seen any signs of that so far. Real money investors have been either holding on to their positions or been net buyers on any movement wider in AT1. Capital is expected to be refinancing-driven as issuers look to optimize their existing stacks.

“And we haven’t seen a panic sell-off — the migration of rates higher has been orderly, as the Fed is largely expected to step in and help crease any excessive volatility. So the moves over the past couple of weeks have helped support the market compress spreads.”

Overall supply meanwhile remains subdued on an historical basis, in spite of the relatively active start to the year.

“The market is expecting net supply this year to be a lot less than the last several years, including in the financial space,” said Attia. “So it’s certainly an area that continues to benefit from strong technicals.”

Bank+Insurance Hybrid Capital: What was the rationale behind your AT1 transaction?

Abanca: Abanca’s objective in this transaction is to continue strengthening and diversifying its capital structure in order to comply with regulatory requirements. With this second AT1 debt issue, Abanca increases its capital ratio by 120bp and meets such debt buffer as is required by the authorities. In addition, the issuance allows the release of CET1 that the bank had been allocating to cover the part of the P2R that can be covered with AT1, increasing the buffer of the highest quality capital.

BIHC: You reopened the euro AT1 market for 2021. Did you have any hesitation about being first into an untested market? Why did you choose to come so early in the year rather than later?

Abanca: We felt comfortable with the market opening after the Christmas period and the read-outs it gave after Monday’s session. Our joint lead managers proved paramount in assessing the risks and rewards of tapping the market so early in 2021. In our view, the risks of waiting further into a year so full of uncertainties outweighed those implicit in playing the role of early bird. And after seeing how the market received our bond, that proved to be the case.

BIHC: What were the key messages to investors during the marketing exercise in relation to your strategy, capital position or other topics? What did investors focus on?

Abanca: The issues discussed with investors during the marketing exercise were diverse and spanned all the major aspects of Abanca’s business, governance and strategy. These would be the three main topics:

Strategy

The first thing to highlight is the execution record of accomplishments performed by the bank. Since 2014, it has consistently met the targets of its strategic plan and been able to generate 8%-9% returns.

The strategy has been based on three main points:

• Transformation towards a simpler, cooperative and innovative company
• Improvement of the customer experience through multi-channel management with best-in-class support.
• Generation of recurring profitability thanks to the: i) growth of the banking business (organically and inorganically), increasing its presence in business lines aimed at companies or means of payment; ii) the diversification of income sources (thanks to the development of insurance businesses and asset management); and iii) efficient use of capital when generating profitability.

Capital position

Sound capital ratios and ample buffers above regulatory requirements, as well as the bank’s capability to generate recurrent capital.

Impact of Covid-19 on asset quality

Four points are important when it comes to understanding the good performance of Abanca in the first nine months of 2020 and the bank’s soundness to face the uncertain recovery scenario:

• Differential entry point: Abanca faces this pandemic as one of the best entities in the Spanish financial system (NPL ratio of 2.6%, NPL coverage of 66%, and Texas ratio of 31%). Despite this, Abanca has made a significant effort in terms of credit provisions during the first nine months of the year (€210m allocated).
• Galicia, the core territory for Abanca due to its presence as a clear leader in the region, presents a better performance at the macroeconomic level than that presented by both Spain in general and other regions in particular.
• The exposure of Abanca’s portfolio of companies and self-employed people to the most vulnerable sectors is lower than that of other competitors.
• Abanca has been very proactive in channelling the aid offered by the authorities to companies and households. These have helped and help Abanca customers to cope with this adverse transitory situation.

Examples of other aspects covered during the marketing exercise are:

• M&A strategy and current vision on the latest movements in the system
• Update of the latest acquisition announced by Abanca (Bankoa)
• The funding plan of the bank
• ESG positioning and developments in this matter
• The bank’s capability to maintain those profitability levels shown in recent years despite the adverse interest rate environment.

Abanca’s de Francisco Guisasola (left) and Vargas-Zúñiga Mendoza

BIHC: How important was the marketing exercise to the overall process and result?

Abanca: Our marketing exercise has to be understood in light of our broad strategy of being as close to our investor base and as transparent as we can be. The roadshow of 5 and 6 January was just fine tuning of this long term commitment to our investor base, tailored towards an AT1 issue — we tried to a) address whatever doubt they might have about the issue or the bank at the time we decided to go to the market, and b) gather intel about their stance on an eventual AT1 Abanca bond.

BIHC: How do you feel about the outcome?

Abanca: We feel extremely happy, not only about the absolute figures, which speak for themselves, but also because it proves our approach to MREL issuance makes sense, in that we understand the whole process to be a long term — if not permanent — task, tackling the most junior instruments first and building from there upwards. The fact that we came from a book of 70 investors in our first AT1 to a 200+ book in this latest one, after issuing two Tier 2 in between, speaks loudly about the market liking this approach. And we feel this is very pertinent, because even after the tightening from IPTs, keeping over 180 individual orders in the book gave us comfort about the final conditions, especially after printing a 6% bond, which is quite remarkable given the rest of our AT1 and Tier 2s’ conditions. We feel it’s worth noting that not only in terms of coupon — this AT1 is 150bp below the one we printed in February 2018 — but also the spread over swaps is substantially tighter — from 732.6bp to 657bp, reflecting what we feel is a better perception of our bank, and greater confidence in our long term business model.

BIHC: How did the level of demand and pricing compare with your hopes and expectations?

Abanca: Although we felt we had a good chance of hitting a sweet spot by launching so early in 2021, and that feeling was backed by very strong investor feedback from our roadshow, we used a bit of caution at IPTs. But very soon the book showed its robustness, reaching two times oversubscription in approximately half an hour. The book grew steadily, giving a hint of a 6% landing zone, which was a bit better than expected. Anyway, the raw pricing is not as important on this occasion as the volume of demand and, perhaps even more importantly, the sheer number of individual investors that cared to show their interest in our paper. We are both delighted and grateful in equal measure about this.

BIHC: Can we expect to see any further issuance from Abanca in 2021?

Abanca: When we printed our first AT1 in 2018, we told investors that we will be a recurrent issuer. This is a commitment that we take very seriously and, within reason for our size and what market conditions dictate, we are committed to complying with it. We have filled our AT1 bucket with this last bond and we had already done the same with our Tier 2 bucket last year, so we anticipate no more issuance of these two particular MREL categories in the near future. We have yet to issue senior preferred/senior non-preferred paper, but we don’t expect to do so within the first half of 2021. Maybe the latter half could see that, but we are definitely not in a hurry to issue anything at this point in time.

On 22 October, leads Crédit Agricole, HSBC, Rabobank, SEB and UBS went out with initial price thoughts of the mid-swaps plus 65bp-70bp area for Rabobank’s senior non-preferred (SNP) seven year green bond. After around an hour and 20 minutes, books were over €1.5bn, and after around two and a half hours, guidance was revised to mid-swaps plus 45bp-50bp, will price in range, on the back of over €2.3bn of orders, and the size was set at €500m-€750m. Books closed in excess of €1.8bn, pre-reconciliation, and the deal was ultimately sized at €750m and priced at plus 45bp, with €1.4bn of orders good at re-offer.

Rabobank said the transaction was received enthusiastically, in particular by responsible investors, which constituted two-thirds of the order book.

“The new issue concession was negative 3bp-4bp, with a final order book of €1.8bn, and represented the tightest seven year senior non-preferred euro transaction of the year,” said Ken Fontijn, funding manager, Rabobank.

George Kalbin, director, FI syndicate at Crédit Agricole CIB, said he saw fair value at 48bp-49bp, based on the issuer’s 2024 SNP paper trading at 43bp and its 2031s at 53bp. The negative new issue premium was better than prevailing levels and he said this pricing achievement was largely attributable to the green element.

“They capitalized on what we’ve been seeing for some time, namely a fairly significant supply/demand imbalance,” said Kalbin. “The green and SRI angle has increased traction across the investor community, with more and more green funds being created, and it’s evident that there is a dire lack of these sorts of assets.

“Also, Rabo have traditionally taken out €1bn to €1.5bn tranches in the senior preferred space,” he added, “and limiting the size to €750m gave investors some reassurance of this deal working and performing in secondary as well. Combine that with the fact that this is Rabobank, probably the best bank capital-wise when it comes to looking at senior non-preferred, that all laid the foundations for a very solid trade and eventually got us to landing inside fair value.”

Kalbin said Rabobank had also been presented with a “decent window”, with many European banks in blackouts and a series of geopolitical developments having ahead of launch limited supply, but the market then proved stable on the day, providing a relatively benign backdrop.

“Due to all the political developments throughout the weeks, it was a challenge to find the right moment,” said Fontijn. “The final launch at a re-offer of mid-swaps plus 45bp indicates that our patience was rewarded.”

Asset managers were allocated 67% of the new issue, banks and private banks 18%, central banks and official institutions 9%, pension funds and insurance companies 4%, and others 2%. Austria and Germany took 34%, France 26%, the UK and Ireland 15%, the Nordics 10%, southern Europe 6%, the Benelux 3%, and other 6%.

Rabobank said that the issue is the first green bond to be aligned with the current draft EU Green Bond Standard (GBS), as well as the Green Bond Principles, following updates to its framework in July.

“We are extremely happy to be the first green bond issuer to do this,” said Fotijn. “This represents a huge step forward for the market.”

Its green bond framework makes reference to elements of the draft GBS, such as the contributions it makes to EU environmental objectives, the “do no significant harm” principle, and taking into account minimum social safeguards. A banker away from the deal said this goes further than other issuers who have declared that their frameworks will be kept aligned with the GBS, although another noted that key elements of the proposed standard — including the EU taxonomy — remain undefined.

Maarten Biermans, head of sustainable markets, Rabobank, said that its initiative fits the cooperative bank’s profile as the highest ranked commercial bank globally in Sustainalytics’ ESG ratings.

“We believe the EU is doing work of paramount importance by rolling out this masterplan that will spur the urgent allocation from private capital to sustainable investments,” he said.

“Following this, we gladly show our support by being the first bank to embrace the EU Green Bond Standard.”

If one thing was known for sure before the Italian general election on 4 March, it was that uncertainty would remain after the event. Just how the old wisdom of “buy the rumour, sell the news” would apply to Italy’s poll was therefore an open question.

Ultimately the results did hold some — potentially unhelpful — surprises, but the market took the outcome in its stride.

“We knew that there wouldn’t be a winner — the electoral law was built precisely to prevent anybody winning,” says one market participant. “What was surprising was the polarisation of the outcome — the large success of the two extreme groupings, the Lega and the Five Star Movement, and the losses of the centre parties.

“But what surprised me most — and not only me — was the reaction of the market. We were expecting this hung parliament situation to penalise Italian assets, but this was not the case; the government bonds performed quite well.”

Post-election, BTP yields were lower than at any time this year.

But while the Italian election may not have proven disruptive to Italian levels, the travails of the wider credit markets have taken their toll on supply prospects.

Most publicly, Banca Carige on 27 March said that it would not follow up a Tier 2 roadshow with a deal. The bank had on 16 March announced a European roadshow starting on 19 March for a euro-denominated 10NC5 Reg S Tier 2 issue, with an expected rating of CCC from Fitch.

“The Board of Directors has acknowledged that the market conditions for a subordinated debt issuance on the expected key issuance terms are not yet in place,” said the bank.

However, market participants say that Banca Carige’s fate was not entwined with the wider Italian banking sector’s prospects.

“I wouldn’t take Banca Carige as a proxy of the Italian market,” says one. “It’s a small bank with a difficult story, and so honestly I was not surprised that they had to postpone that transaction.

“The overall credit market conditions have been quite challenging and the appetite for risk has definitely fallen in the past weeks, and if you combine that with the weakness of the Banca Carige rating, the peculiarity of the Italian situation after the election, and the general weakness of credit markets and equity markets, the outcome was not surprising at all.”

The first Italian issuer to test the market after the onset of this bout of volatility was UBI Banca, which on 5 April launched its first senior non-preferred (SNP) issue and only the second such instrument out of Italy.

The Italian government had on 23 December implemented the updated EU-wide bank creditor hierarchy in its 2018 budget law, introducing the new debt category of senior non-preferred (strumenti di debito chirografario di secondo livello) ranking below ordinary claims (crediti chirografari) and above subordinated claims.

National champion UniCredit then on 11 January successfully inaugurated the Italian SNP market with a EUR1.5bn five year deal, attracting some EUR4.5bn of demand from more than 250 accounts to the debut.

The deal took advantage of a positive market tone in the first couple of weeks of the year and improving sentiment towards the UniCredit name. This had been evident a month earlier when on 13 December the Italian issuer had rounded off the first year of a strategic plan with a EUR1bn perpetual non-call June 2025 Additional Tier 1.

“The positive market backdrop and recognition of the ongoing progress of the strategic plan ‘Transform 2019’ has led to a significant repositioning of UniCredit credit profile among the European financial institutions, and the placement of this bond represents a further tangible achievement,” said UniCredit upon making its SNP bow.

Funds were allocated 67%, banks 18%, and insurance companies and pension funds 8%. The UK and Ireland took 22%, France 20%, Italy 15%, and Germany and Austria 10%.

The transaction — rated Baa3/BBB-/BBB by Moody’s, S&P and Fitch — was priced at 70bp over mid-swaps, in from initial price thoughts of the high 80s and subsequent guidance of the 75bp area.

“Helped by the investment grade ratings, UniCredit managed to achieve very attractive pricing,” says Maurizio Gozzi, managing director, DCM, at Crédit Agricole CIB (CACIB), “and the deal performed well post-launch, so their approach was vindicated.”

UBI debuts in senior non-preferred

UBI Banca took the plunge with its debut senior non-preferred issue on 5 April, having spotted a window of stability amid the changeable markets.

“We had been monitoring the market for some time,” says Giorgio Erasmi, head of funding at UBI Banca (pictured below). “The situation had been volatile and weakening, but we saw a day with positive equity markets that could be used.

“We have in our plan different issues across the year and were keen, if possible, to launch this inaugural deal ahead of our blackout period later in the month. It is still not a very easy market, but we are happy with our success.”

UBI’s leads went out with initial price thoughts of the mid-swaps plus 145bp area for the five year deal citing a benchmark size. After around two hours the books were above EUR750m and another couple of hours later, with books above EUR1bn, the spread was set at 140bp over mid-swaps. Two hours later the deal was launched with a EUR500m size and books at around EUR1bn.

Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, highlights the level achieved by UBI versus senior preferred levels, putting the subordination premium paid at 35bp-40bp – not far off what UniCredit achieved in more benign market conditions. The 140bp re-offer spread also compares with a Tier 2 level of around 300bp for UBI 10 year non-call fives callable in September 2022 — meaning the bank achieved a much larger saving versus Tier 2 than its bigger compatriot, whose comparable Tier 2 was trading at around 185bp.

“A transaction size of only EUR500m at this level is a very good deal for investors, while 150bp inside the Tier 2 curve is a strong achievement for the issuer,” says Hoarau. “UBI Banca achieved a very competitive credit spread differential versus investment grade-rated peers.”

Italian investors took 50% of the issue, France 21%, Germany and Austria 10%, the UK 7%, Spain 7%, Switzerland 4%, and others 1%. Fund managers and private banks were allocated 62%, banks 26%, and insurance companies and pension funds 12%. Some 130 accounts participated.

Although rated investment grade by Fitch and DBRS, at BBB- and BBB (low), UBI Banca’s SNP paper is rated sub-investment grade by Moody’s and S&P, at Ba3 and BB+.

“It was a very positive result to see the book over EUR1bn in this market and with this instrument’s split rating,” says Erasmi. “It was an important test and we have been happy to see that there is broad demand from investors even despite the split rating.”

Retail rating drivers

While the new class of Italian debt has been introduced in line with EU MREL requirements — and TLAC requirements, for the only Italian G-SIB, UniCredit — UBI Banca’s initial issuance was ratings-led, according to Erasmi.

“At the moment, this new instrument is going to be used in the liability structure to give support to the rating of senior preferred, according to the rating agencies’ criteria,” he says.

Moody’s, for example, had previously flagged the evolution of senior debt as a potential drag on the issuer’s rating.

“UBI Banca’s senior debt rating could be downgraded if a reduction in the volume of senior debt outstanding is not offset by new issuance of senior and/or subordinated debt so that current loss-given failure (LFG) is preserved for these securities,” it said in a 2017 rating update.

Leading to a potential contraction of senior debt among Italian banks is the redemption of bonds that were in the past sold to retail, a practice that has been curtailed due to the now bail-in-able nature of senior debt being deemed inappropriate for such investors. This led Moody’s to take rating actions on certain Italian banks last year.

See Moody’s Q&A here for more on the rating agency’s views on this, bail-in and other factors affecting its Italian bank ratings.

“Moody’s LGF methodology is penalising the Italian banks that are not rolling the senior unsecured bonds that are maturing,” says Gozzi at CACIB. “Thanks to the TLTROs, they don’t need the liquidity, and because they need to improve profitability, banks are tending to roll these maturing senior retail bonds into asset management products to catch the upfront fees instead of an interest margin that is not so rewarding in the current interest rate environment.

“So on the one hand they are improving their profitability, but on the other they are receiving pressure from Moody’s methodology.”

Filippo Alloatti, senior credit analyst at Hermes Investment Management, says that Moody’s LGF methodology is problematic for most of the second tier banks, deprived of a sizeable senior buffer.

“Yet with UniCredit the rating agency took a forward-looking approach in terms of future issuance,” he adds, “and the Baa3 rating for its senior non-preferred made it eligible for investment grade indices.

“Banks such as UBI (whose SNP rating by S&P is BB+), Mediobanca and Banco BPM, BPER or even Monte will be watching such developments closely.”

Some EUR5bn of UBI Banca senior retail bonds fall due across 2018.

“There are important maturities of retail bonds, and, given the bail-in rules, in our industrial plan we will rely more on the institutional side for bonds,” says Erasmi. “Given the volume of the expiring retail bonds, we will issue on the institutional side both covered bonds and senior preferred and, for smaller amounts, senior non-preferred.

“Issuing the senior non-preferred builds up the support for a buffer under Moody’s LGF methodology that enables us to maintain two notches of support above our BCA [ba2] for the rating of our senior preferred [Baa2], even after the significant maturities on the retail side.”

A menu of instruments

Despite UniCredit having moved quickly to open the Italian senior non-preferred market, expectations regarding supply of the new instrument are balanced.

“After the inaugural transaction from UniCredit in January, Italian banks are ready to jump on the senior non-preferred bandwagon,” says Alloatti at Hermes. “Yet in terms of supply — with Intesa having shown little interest for tapping the SNP market this year and UniCredit recently hinting of not being into a rush to complete the issuance of remaining EUR5bn and potentially be absent from the SNP market for the rest of the year — the supply should be limited.

“Sure, if we look at the UniCredit SNP the premium over the preferred senior of less than 30bp at issuance make the instrument a lot more compelling than the classical Tier 2. Yet existing Italian preferred senior, as junior-ranking to the whole deposit stock, will most likely qualify for MREL eligibility.”

At UBI Banca, Erasmi says the final size of its senior non-preferred issuance will be analysed once the bank has more details about its MREL requirement.

“But having started early and with no rush, I would imagine having not only the one senior non-preferred issue this year, but more, even if in a very opportunistic way,” he adds, “so a part of this buffer in our view could be in the future built through senior non-preferred.”

UBI plans to achieve a core equity tier 1 ratio of 13.5% in 2020, up from 11.4% today, with its total capital ratio set to rise from 14% to around 17%.

“At the moment, there are no public MREL numbers — we understand the requirement could be in an area of roughly 22%, 23% for banks like UBI Banca,” says Erasmi. “That implies that maybe 5% or 6% of the MREL requirement could be fulfilled in part with senior non-preferred.”

Domestically systemically important banks (D-SIBs) Intesa Sanpaolo, Banco BPM and Monte dei Paschi di Siena will meanwhile have to factor in other capital requirements.

“Senior non-preferred is MREL eligible and can be very helpful in matching subordination requirements within MREL,” says CACIB’s Gozzi, “but for the time being the regulator is still not sending out this requirements. The D-SIBs should receive it sooner rather than later, while the others it could be a year-end exercise or even next year.

“So the instrument that may turn out to be more prevalent in the short term will perhaps remain senior preferred, i.e. the old senior unsecured format, which banks may find the cheapest way to retain the buffer required by Moody’s.”

He further notes the importance of more than EU200bn of TLTRO repayments in determining supply dynamics — even if much of this will not need to be refinanced.

“This will be starting in mid-2019, but the bulk of TLTRO redemptions in Italy — and across Europe —is in June 2020. However, because the monies are only included in the NSFR ratio until a year before maturity, we could see banks beginning to prefund this from next year to avoid a cliff effect — although not yet this year.

“The main instruments for replacing the TLTRO money will probably be covered bonds, the cheapest in the market, but why not senior preferred?”

Find out La Banque Postale Asset Management’s view on Italy’s “two-speed” banking system here.

The Swedish National Debt Office (Riksgälden) revealed its MREL framework on 23 February and, not for the first time, the countries’ financial authorities found themselves in opposition to the banking industry over the “gold-plating” of regulations.

“Our view is that the Swedish MREL requirements are very strict compared both to TLAC and to the requirements that will be the case for other banks in the EU,” Johan Hansing (pictured), chief economist at the Swedish Bankers’ Association (Bankföreningen), told Bank+Insurance Hybrid Capital.

However, in a joint report for the government, Riksgälden and Finansinspektionen (FI, the Swedish FSA) on 11 May, the authorities declared the design of Swedish regulations appropriate. They defended the MREL requirements, saying they are stricter than the minimum requirements set out in EU law due to the country’s large and highly interconnected banking sector as well as its considerable dependence on market funding.

“The report shows that Sweden has a well-functioning regulatory framework that reduces the risk of financial crises,” concluded Finansinspektionen director general Erik Thedéen and Debt Office director general Hans Lindblad.

They further argued that European Commission proposals to amend banking regulation could significantly alter discretions for national authorities, and in Sweden’s case have a “primarily negative” overall economic effect.

The disagreement over the MREL requirements had been brewing since more than a year ago, with the Debt Office having published its proposals in April 2016.

Analysts point out that the final version of the MREL framework is less burdensome than that originally outlined. Swedbank analysts, for example, note that one of the two elements that make up MREL, the recapitalisation amount (RCA) — the other being the loss absorption amount (LAA) — is lower because the November 2016 EC proposals stipulate that the combined buffer requirement (CBR) should be deducted from the RCA, rather than the RCA equalling the total capital requirement, as the Debt Office had believed should be the case, with macroprudential elements of the Pillar 2 requirement also excluded.

The EC nevertheless also proposed that resolution authorities can also introduce Pillar 2 guidance, although — unlike the formal MREL — this would not be a hard trigger of resolution or restrictions on coupon payments.

“The SNDO decided to wait until the EC proposals are adopted into EU law before taking a stance on eventual MREL guidance,” said Swedbank’s analysts. “However, in its MREL memorandum it clearly leaves the door open to introducing MREL guidance.”

The SBA’s Hansing meanwhile characterises the changes from initial to final proposal as “only small adjustments”.

“We would like the Swedish system to be in line with other systems in the EU,” he says. “Swedish banks have very high capital requirements.”

Hansing explains that the method used by the Debt Office implies that the MREL requirement will be twice the capital requirements — meaning that the higher the capital requirements, the higher the MREL requirement.

“This is not logical in our view,” he says. “Furthermore, the Debt Office require that MREL only be met with capital and subordinated debt, which means the large Swedish banks have to issue subordinated bonds to an amount of SEK500bn (EUR52bn).”

Individual MREL requirements will be set towards the end of the year, after FI’s supervisory review and evaluation process (SREP). The requirements will then be phased in from 1 January 2018 — when the liabilities proportion will become effective, i.e. firms should have MREL liabilities at least equivalent to the recapitalisation amount — to 2022, when a requirement that MREL be met with subordinated instruments will come in.

Even if Tier 2 debt will be eligible, the subordinated instruments in question are set to be Sweden’s version of the senior non-preferred asset class pioneered by France with its legislative product, which the EC will move all member states towards, and followed up on by Spain’s Santander with a contractual version. Market participants suggest that a combination of factors mean that Swedish banks are likely to wait until a legislative solution is in place.

“The understanding is that we will end up with a new type of security very closely related to the French approach,” says a representative of one bank. “But from an issuance perspective, it’s still going to be quite some time before any Swedish issuers are going to move on this — even if it is clear the resolution authorities would like banks to move well in advance of any deadline. One of the reasons is that it’s going to take quite some time before the Swedish government concludes legislation, and the changes are not likely to start to be implemented before the EC work is concluded.

“So I would say that we are definitely talking a year and a half or longer. It is not clear what would trigger issuance any sooner as that would mean going out with transactions that are sub-optimal, both from a cost perspective and a structural perspective.”

However, in an analyst call following Swedbank’s first quarter results, head of investor relations Gregori Karamouzis left open the option of pre-empting a legislative solution when it comes to MREL.

“First, we want to know what the requirements are,” he said. “We want to see how long it will take for the insolvency law to be changed in Sweden to be allowed to issue those type of instruments. If we make the assessment that it takes too long and we want to get started, we might look at different structures that are being discussed in the market, as you know, with calls and different structures that basically allow you to either buy back or convert those instruments into something that is eligible later on.

“It’s a consideration that we are working on and thinking of,” he added, “but we’re not at all in a hurry to come to the market early.”

Contractual-based issuance is, however, not widely expected, not least because the terms and conditions of outstanding Tier 2 instruments preclude higher ranking subordinated debt issuance. The absence of holding company/operating company structures among Swedish banks rules out the alternative structural solution that might otherwise have been possible.

Swedish banks are not, meanwhile, expected to be troubled by the 2018 implementation date, having sufficient senior unsecured debt outstanding to meet the forecast MREL amounts, before transitioning to having up to around half of this replaced by Swedish senior non-preferred by 2022.

Click chart to zoom

“The introduction of a new funding instrument will lead to important changes for the Swedish banks,” said Swedbank analysts. “However, we believe that these changes will be relatively straightforward.

“Given that the subordination requirement will be applicable only from 2022, banks will not have to increase wholesale funding beyond their funding needs. Rather, we anticipate that the banks will let senior unsecured bonds mature and replace them with senior non-preferred, until 2022.”

They estimate that Swedbank will face the biggest change, with around 50% of senior unsecured debt needing to be replaced by senior non-preferred, with the respective Nordea figure being 48%, SEB’s 44% and Svenska Handelsbanken’s 31%.

Handelsbanken CFO Rolf Marquardt said in a first quarter results analyst call that the bank is in “wait and see” mode when it comes to getting greater clarity on the way in which MREL requirements will be met.

“And we also think that we have a really good position since we have a lot of maturing senior unsecured debt that we could start replacing when we know the rules of the game,” he confirmed. “So we think we still have time to wait a bit until we move.”

Why did you come to the market at this time?

There were a number of reasons. Firstly, we had concentrated issuance of Tier 2 on the retail market in the last couple of years to satisfy the significant customer demand we were seeing. It thus felt important to diversify and tap the institutional market, given our long absence and to prove our ability to successfully do deals in that market. Secondly, we had seen a significant rally in our bonds on the back of the buy-back we announced previously. They tightened quite significantly, roughly 65bp, before we came with the Tier 2.

It was a classic liability management exercise. We ran the capital buy-back, buying back bonds from investors that potentially wanted to sell, created new space for new issuance, helped our secondary curve tighten, and then on the back of that, and a pretty positive backdrop, we effectively issued a Eu750m deal that was two times oversubscribed.

We moved very quickly — we closed the buy-back on the Tuesday and issued on the Thursday of the same week.

Was the size of the Tier 2 set from the start?

We said Eu500m-plus. We could have potentially done a Eu1bn deal, as we had a Eu1.5bn book, and if the book had been over Eu2bn we may have considered this. But most of the deals that have come recently, including the recent Deutsche Tier 2, have all been around Eu750m. So we decided we’d rather have a deal that’s slightly smaller to try and have it trade well in the secondary market, rather than stretch the book out to allocate Eu1bn.

You mentioned attractive backdrop — are you thinking more of the general market conditions in the capital space, or related to Italian banks and UniCredit?

It’s a combination of both. You need the market to be in decent shape, and more importantly you need people to have a positive stance on your credit.

Having a 60bp rally in your credit in the week leading up to issuance is a pretty compelling sign that people are going long your credit — mainly because of the buyback, but also potentially a positive momentum around the credit story.

It was an interesting choice of day, because we decided to come the day of Corpus Christi, with Germany and Austria shut, so part of the investor base was unavailable. The decision we took was that if we didn’t come on the Thursday, effectively Friday was going to be very difficult because there was a Monday bank holiday in the UK and the Germans off on the Friday as well as Thursday, with a lot of people taking long weekends — so even fewer people were going to be at their desks. And Friday is never a great day to do a deal. So effectively that pushed you to Tuesday, but we knew beforehand competing supply was imminent, and Generali did in fact come on Tuesday at roughly the same spread as us, plus another three Tier 2 deals. So the choice was: do you go on Thursday knowing that you don’t have the German investor base, or go on Tuesday knowing you probably go head-to-head with a very similar credit with a similar spread and with a lot of supply coming.

I think we made the right choice. We avoided having a head-to-head with Generali, we avoided having to deal with competing supply, and it may have cost us Eu200m or so in orders but the book was well over what we needed to get a nice trade done.

To what extent did the buyback play into that?

The buy-back kind of fulfilled the desire of certain clients to get out, and actually not a lot of clients sold. We were looking to buy Eu700m, and only around Eu400m was tendered.

You can read that in two ways. You can say, well, that wasn’t too great… But it’s also actually a pretty positive reflection on the credit. People have seen a sell-off in the credit and asked for a liquidity event, but interestingly when you say, OK, put your money where your mouth is and sell me the paper, they’re still saying no – some people are not willing to part with their paper even for a three point premium. So on the basis of that, and the rally we had because of the buyback, and some people actually asking for more paper, we went ahead with the Tier 2. So there’s always a bit of a silver lining.

You mentioned you’d done retail Tier 2 — will that be more difficult going forward?

At the moment, given some of the political noise around this, yes, I think that’s going to be more difficult. I think it’s important to underline that Consob has not banned the sale of retail Tier 2. But I think given the political climate, it is harder to place Tier 2 in the retail network today, yes.

Looking at the credit side, there’s been these moves with the Atlante fund. Is that a credit positive, and is it playing into people being attracted to Italian credits again?

Yes, I think it’s definitely credit positive. It’s fulfilling two roles, right: making sure that recaps of banks like Vicenza — and we’re waiting to see what the result is going to be on Veneto Banca — effectively have a backstop for their equity capital raisings; and secondly, also as an additional tool to help Italian banks divest of their NPL stock.

There’s no magic wand. I think the market’s expectation on NPLs is perhaps not realistic. A stock of anywhere between Eu170bn and Eu300bn, depending on how you classify it, is not going to disappear overnight, but Italy is making good progress in addressing this important issue over a reasonable timeframe.

The UK insurer’s deal was the first subordinated FIG trade in European markets since mid-April but it was soon joined by others from the sector: Prudential, SCOR, KLP and Swiss Life.

Aviva’s trade came after it closed its acquisition of Friends Life in mid-April and, according to Susan Sharrock Yates, deputy group treasurer at the insurer, the issuer was keen to go on the road to present its story to investors and lock in the prevailing low rates. It therefore held a roadshow, from 21 May, and considered the market thereafter.

“And then we thought, well, markets are volatile, but we can’t see that improving over the short term at all, and we were keen to get something done before the summer,” said Sharrock Yates. “Fortunately, once we were ready to go we saw a slightly easing of volatility, and to be honest given our banking group and given our story, and the feedback that we had received from investors on the road, we were confident that we would be able to get something done.”

The issuer was able to attract Eu5bn equivalent of demand for the combined 3.375% 30 non-call 10 euro and 5.125% 35 non-call 15 sterling tranches, the latter being added instead of a long-dated euro tranche, with pricing of 255bp over mid-swaps and 290bp over Gilts, respectively.

“We are very happy indeed,” said Sharrock Yates. “The pricing is historically the lowest rate we have issued at. And given the market backdrop I was very pleasantly surprised by the size and quality of the order book, which was almost Eu5bn equivalent, and we managed to tighten pricing 10bp inside the initial price thoughts.

“Just two weeks later book sizes were falling and price tightening of that order became very challenging, so we were fortunate in getting a bit of a sweet spot in the market before Greece and other concerns started rearing their heads.”

Other insurance companies also managed to do so. Prudential sold a £600m 40 non-call 20 the following week in sterling at 260bp over Gilts following IPTs of the 265bp area. On the same day in euros KLP tapped the market (see separate article) and SCOR SE priced a Eu250m 32 non-call 12 issue. SCOR’s issue was more than three times oversubscribed with over 100 accounts in the book, allowing the issuer to tighten pricing from the 240bp area to 225bp over mid-swaps.

“We moved 15bp from IPTs to landing, which not many transactions have done recently,” said Robert Chambers, FIG syndicate at joint bookrunner Crédit Agricole CIB. “That’s reflective of, firstly, the interest in the credit and, secondly, the deal size being smaller, which meant that given the oversubscription levels we could move in a bit further.

“We saw the NIP at 15bp, which is a touch inside some of the other subs, and it tightened a healthy 5bp on the break. So on the face of it a very good result, especially ahead of the latest ECB meeting and Greek repayment date.”

Swiss Life rounded off the series of insurance sub debt issues with a Eu750m 4.375% perpetual non-call 10 issue the following week, on 8 June, launched after a roadshow. The deal was priced in the middle of IPTs, at 330bp over mid-swaps, with the books twice oversubscribed.

“In spite of the volatility we managed to issue what was the maximum amount we considered, and I would say this is a sign that investors have confidence in our credit,” said Luca Pescatore, head of capital management at Swiss Life. “I think it worked out well.

“Again, the issuance window was very short, and already the day after we issued the markets started getting tougher, with widening credit spreads, so I think we issued with the right pricing.”

Indeed, no further European insurance sub debt emerged in the following weeks. Uniqa Insurance Group had on 1 June announced a roadshow for a potential Eu500m dated subordinated offering, but, like many financial institutions’ subordinated projects, this remained in the pipeline as volatility and uncertainty increased.

Perception of relative value vs. outstanding undated Tier 2 instruments and bank AT1s

When comparing Solvency II Tier 1 with undated Solvency II Tier 2, the majority of survey respondents assess the potential multiple at approximately 1.55x for investment grade notes, and 1.65x for subinvestment grade notes. Nevertheless, the results show a high variance, especially on the investment grade side, which signals that the investor perception of the product is still developing.

In terms of loss absorption mechanism, investor friendly formats (temporary write-down, equity conversion) can carry an average 40bp premium over the permanent write-down structure for Solvency II Tier 1 instruments.

Respondents appear to appreciate the structural differences with bank AT1 instruments, mostly stemming from the absence of MDA restrictions on coupons, and lower constraints on write-up mechanism. 44% of the respondents see a Solvency II Tier 1 50bp tighter than a bank AT1 and 28% value the differential at 75bp.

For information on survey participants, please see below.

Where should a Solvency II Tier 1 trade, relative to an undated Solvency II Tier 2 instrument, to compensate for the loss absorption features (fully discretionary non-cum coupons and trigger-based principal loss absorption)?

Perception of the main risk drivers of the spread differential

Respondents mainly identified potential restrictions on coupons (full discretion and distributable items cap) as the main drivers of the differential between undated Solvency II Tier 2 and Solvency II Tier 1.

Given the definition of trigger events, the bulk of investors (64%) believe that the SCR Margin should be above 180%.  e disclosure of the Solvency II capital structure, including the composition of Tier 1 capital, was identified as the most important factor in the investors’ analysis of an insurance capital instrument.

How do you rank the following drivers of the differential estimated in the previous question? (1 being the most important and 4 being the least important)

Given the definition of Solvency II Trigger Events, where should the SCR Margin be?

A Solvency II Tier 1 may be considered as relatively more investor friendly than a bank AT1 instrument (absence of MDA restrictions on coupons, less constraints on write-up mechanism). Under current market conditions, and assuming an identical credit strength, how much would you value the spread difference between the two instruments?

In addition to the SCR Margin, how do you rank the following criteria in your analysis of an insurance capital instrument?

Relative costs of forms of loss absorption mechanisms

Investor friendly formats can carry an average 40bp premium over the permanent write-down structure for Solvency II Tier 1 instruments.

Use of optional ACSM clauses

Based on the weighted average of the responses, an optional “Alternative Coupon Settlement Mechanism” (ACSM) clause could compress the Tier 1 premium by approximately 25bp-30bp and potentially more for sub-investment grade notes. This is in line with the findings on the perception of the main risk drivers, which indicate a focus on coupon cancellation risk.

Appetite for forms of loss absorption mechanisms

Overall, investors seem to show a lower appetite for Solvency II Tier 1 compared with undated Solvency II Tier 2, at least under current market conditions. In line with the results on relative value, permanent write-down is the least favoured loss absorption mechanism, as opposed to “partial and sequential” temporary write-down, which is confirmed to be the preferred format.

What would be your size appetite (as a percentage of your appetite for undated Solvency II Tier 2 instruments) for the following notes?

Solvency II Tier 3

We took this opportunity to also test investors’ perceptions of Solvency II Tier 3 instruments. Respondents seem to award an average 40bp spread differential to dated Solvency II Tier 3 instruments relative to dated Solvency II Tier 2 instruments with the same maturity. On the other hand, appetite appears to be in general more limited, although this could be the consequence of lower familiarity with the product.

Where should a 10 year Solvency II Tier 3 trade relative to a dated Solvency II Tier 2 instrument with an identical maturity?

Where should a 10 year Solvency II Tier 3 trade relative to a dated Solvency II Tier 2 instrument with an identical maturity?

Respondent universe

We collected answers from a relevant sample of investors based in Europe (92%) and the US (8%), with the majority composed of asset managers (68%). All survey respondents are already active in insurance dated subordinated debt, 96% in insurance undated subordinated debt and 92% in bank Additional Tier 1 (AT1) instruments.

NB: Please note that, throughout the survey, weighted average figures assume mid-point of ranges or estimates based on the answers’ intervals