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Trepidation showed signs of turning into
capitulation on Friday as dislocations
began to crystalise in the face of the sur-
prise French election, which overshad-
owed 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 Emma-
nuel 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 be-
forehand 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 con-
tender, the leftist Front Populaire coali-
tion that is also ahead of Macron’s party,
similarly feared.
The widening accelerated into Friday,
prompting French agency Sfil to post-
pone 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 inves-
tors are demanding to own French gov-
ernment 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 resur-
gence of flight-to-quality trades.
“Hopefully we find a catalyst for stabi-
lisation 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 major-
ity in the National Assembly in a matter
of weeks is monumental,” said Hoarau,
“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 big-
gest 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 be-
fore 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 Hoa-
rau, “and as soon as markets settle down
with less instability, issuers, particularly
corporates, may well force through trades
Macron puts Powell in the shade as markets
recoil at prospect of RN, torpedoing supply
1 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
Having been caught off guard by Macron’s Sunday night gamble, markets’ reaction to the risks this
threatens to unleash were initially modest, but fears escalated through the week such that by Thursday
they were overshadowing what had hitherto been flagged as the macro event of Q2. Neil Day
reports on the fall-out, with insights from Crédit Agricole CIB syndicate, trading and research.
In association with
Bank+InsuranceHybridCapital Briefing
16 JUNE 2024
Inside:
RN potential in focus — page 3
Phoenix landmark — page 4
CRR3/CRD6 through, but
impact still unclear — page 5
LM, AT1 updates — page 6
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 unchar-
tered 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 Je-
rome 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 mar-
ket was pretty much setting itself up for
a summer grind,” said William Rabi-
cano, director, credit trading at Crédit
Agricole CIB. “Investors are still long li-
quidity 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 posi-
tive momentum to successfully issue cap-
ital instruments upon exiting blackout
periods in early May, with both Santand-
er and Erste Group selling AT1 on 7 May.
At €1.5bn, the Spanish bank’s perpet-
ual 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 is-
sue 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. “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 San-
paolo 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 big-
gest book in the series of euro AT1, at-
tracting some €9bn of orders to a €1.5bn
8.125% perpetual non-call 5.8, tighten-
ing 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 Ah-
mad, 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 inter-
estingly they saw a lot of take-up in the
US, not just Europe.”
The strong AT1 supply was accom-
panied 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, imply-
ing 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 Com-
monwealth Bank of Australia was able
to match the following day on a €1bn 10
non-call five Tier 2. l
2 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
In association with
MAN CANNOT DISCOVER NEW OCEANS UNLESS
HE HAS THE COURAGE TO LOSE SIGHT OF THE SHORE
Bloomberg: € = BGCS2 Global Directory = BGCP
3 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
In association with
“The example of the 1997 dissolution — the only true dissolution
— should prevent future presidents from using this weapon
carelessly.”
Last Sunday it became evident that Emmanuel Macron had
not learned the lesson that French presidents would be wise to
avoid the miscalculation of Jacques Chirac — as portentously
flagged by Crédit Agricole CIB economists back in 2021 —
when he dramatically set France on a course that has left large
parts of its population, neighbours and financial markets fret-
ting about the future.
With the Rassemblement National (RN) coming first with
31.37% of votes in European elections, and Macron’s centrist
Ensemble coalition on just 14.6%, the prospect of defeat for
France’s traditional parties by the far-right RN after first and
second rounds of voting on 30 June and 7 July, respectively, is
likely, according to Valentin Giust, global macro strategist at
Crédit Agricole CIB.
Indeed, his central scenario is a substantial majority for the
RN, with an absolute majority only just shy of being the base case.
“There are unquantifiable factors and uncertainties — voter
turnout, candidates who drop out of three-way races, correla-
tions between first-round scores and second-round gains —
that mostly create upside for the RN in terms of the final results
versus the central scenario,” he says.
This is despite early polls not reflecting the factional ma-
noeuvring that occurred this week and thus being of questiona-
ble value, not to mention the unprecedented political backdrop.
For example, it has been suggested that Macron had expected to
benefit from the left being dispersed, as was the case in the Eu-
ropean elections, but its parties have quickly coalesced to form
the Front Populaire bloc, whose combined European vote share
was ahead of Ensemble.
As well as flagging this miscalculation, Louis Harreau, head
of developed markets macro and strategy at Crédit Agricole
CIB, is sceptical of suggestions Macron was seeking to lay a trap
for the RN by calling an election it could realistically win. The
argument is that the RN would struggle to maintain its popular-
ity in government, leading to a loss to Macron’s party in 2027
presidential elections.
“We have our doubts about this strategy, to be honest, as it
would mean that Macron hopes that France would be in a dire
situation in three years’ time,” says Harreau.
The prospect of the 2025 budget facing a no-confidence
vote in September and impending general political gridlock
are deemed the most practical reasons for Macron’s gamble.
But markets are now faced with pricing in a RN budget and
considering whether the president’s purported prediction may
come to pass.
Based on the economic platform it put forward in 2022
presidential and legislative elections, but taking into account
the current context, Giust and Harreau reckon that an RN pro-
gramme would imply a spending hike of around 2% and fiscal
relief of more than 1% of GDP, with some one-offs adding to the
deficit in its first year. They calculate that, if fully implemented,
it would result in deficits of 6%-10% of GDP per year over the
next five years, pushing French public debt towards 128% of
GDP by 2028.
“Cautious conclusions should prevail due to the very limited
visibility on RN’s economic priorities as well as its future leeway
to enforce them,” says Harreau. “In addition, the latest speeches
by RN leaders point to a need for fiscal consolidation and call
into question some measures, e.g. pension reform.
“A few key measures could offer RN a substantial political
return at a manageable budget cost (i.e. below an additional
1ppt of GDP per year of deficit),” adds Giust. “Of course, these
projections are subject to extreme caution, not only because of
the action of the government, but also because of the change in
the economic outlook and of the potential change in the cost
of debt.”
Giust and Harreau nevertheless warn that RN’s economic
programme, if implemented in full, is likely to significantly in-
crease doubts around France’s ability to sustain its public debt.
“This situation would have the potential to trigger signifi-
cant tensions on French assets — and some European assets.”
While acknowledging that the RN could adopt a more prag-
matic stance in light of this, and also to set itself up for the 2027
presidential election, they highlight the potential hit to France’s
funding costs and potential knock-on effects.
“In this context, the uncertainty regarding France’s public
finance outlook will remain extremely high until the election,
but also until the new government — if it is an RN government
— shows how it intends to govern: in line with its promises or
with pragmatism.”
Clarity on the RN’s ambitions should develop after the cam-
paign officially starts tomorrow (Monday). The new National
Assembly is scheduled to gather on 18 July, with a new prime
minister potentially in place in time for the start of the Paris
Olympics on 26 July. l
A ‘dire situation’? RN potential in focus
Valentin Giust and Louis Harreau,
Crédit Agricole CIB
4 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
In association with
UK insurer Phoenix Group Holdings is-
sued the first US dollar Restricted Tier
1 instrument since October 2021 on 6
June, a $500m perpetual-six year issue
that in conjunction with a tender offer
marked a novel opportunity for inves-
tors to roll outstanding RT1 holdings
into a new on-the-run RT1.
While several insurance companies
have eyed RT1 to potentially refinance
grandfathered Tier 1 instruments as an
alternative to Tier 2, where they may
have insufficient headroom, Phoenix
approached the market ahead of an
RT1 call next year with the new issue
and tender.
The package was announced on
Wednesday, 5 June, teeing up a new
$500m (£390m, €460m) no-grow
perpetual-six year Reg S issue, expect-
ed rating BBB+ (Fitch), and launching
a capped tender offer for its outstand-
ing $750m 5.625% perpetual non-call
2025 RT1 and a $500m 4.75% 2031
non-call 2026 Tier 2, of which $350m
was outstanding.
“The issuer adopted a very investor-
friendly approach, in allowing investors
the possibility to roll into a new RT1 with
an on-the-run coupon,” said André
Bonnal, FIG syndicate at joint bookrun-
ner Crédit Agricole CIB.
“Subordinated insurance was rela-
tively active in Q1, specifically in RT1
with the Axa reopening at the start of
the year,” he added, “but it is good to
see further RT1 issuance, this time in
US dollars, among the flurry of subor-
dinated insurance deals and alongside
the bank capital activity, with the tender
and new issue combo also in line with
the AT1 trend we have been seeing.”
Following investor calls, Phoenix’s
leads the next day went out with initial
price thoughts of the 8.5% area for the
perpetual-six year issue. After around
two hours and 40 minutes, they report-
ed books above $1bn, and after around
three hours and 10 minutes, they set the
spread at 8.5% on the back of books
above $1.15bn, pre-reconciliation and
including $50m of joint lead manager
interest. Some $775m of orders were
good at re-offer, which implied a new
issue premium in the context of 12.5bp-
25bp.
The deal reopened the US dollar
RT1 market after a hiatus since October
2021, when compatriot Rothesay sold
the last such instrument.
“This was an interesting trade be-
cause we hadn’t seen any US dollar
RT1 supply for a very long time,” said
Bonnal. “That meant the process was
always going to involve a high degree
of price discovery.
“Furthermore, all the bonds issued in
2021 were sold in a very different rates
paradigm, so had very low coupons, re-
sets and cash prices.”
Ahead of Phoenix’s announcement,
Rothesay Life on 3 and 4 June issued
sterling and US dollar Tier 2, respec-
tively, the latter a $325m 7% 2034
10.25 non-call 5.25 rated Baa1/BBB+
(Moody’s/Fitch). Bonnal said that while
Asian investors among the audience for
Phoenix’s new RT1 were considering
potential pricing above the 8% mark in
the context of dollar AT1s with at least
one investment grade rating trading in
the high 7s, European investors — pre-
dominantly UK accounts familiar with
the credit — were more likely to use the
Rothesay Tier 2 as a reference, factoring
in an RT1-Tier 2 differential of 150bp
or more. These dynamics contributed to
the pricing at 8.5%.
“Pricing 150bp back of Rothesay Tier
2, i.e. where UK institutional investors
saw fair value, is a strong outcome,”
said Bonnal, “and the issuer is clearly
happy.
“It represents a successful reopening
of the dollar RT1 market. And through
the tender they have been able to buy
back a substantial amount of the out-
standing RT1.”
The tender offer was for up to the
amount of the new issue and prioritised
the outstanding RT1 over the Tier 2, and
on Friday (14 June) Phoenix announced
that it had accepted $500m of the RT1,
at a purchase price of 100.00, meaning
none of the Tier 2 was bought back.
Jakub Lichwa, portfolio manager at
TwentyFour Asset Management, said af-
ter Phoenix’s new issue that the overall
exercise was notable and welcome in
hopefully being the first step in insur-
ance companies building up a track
record of calling RT1s at their first call
date — like banks with their AT1s —
thereby potentially driving performance
of the asset class.
“We would also note that the $500m
redemption (via tender at par) is coming
in over six months ahead of the sched-
uled call date,” he said. “This removes
further uncertainty around the call, and
demonstrates a proactive approach
from Phoenix towards its debt capital
instruments.
“Again, it is still too early to argue
that this will become a trend, but in-
evitably Phoenix’s approach lays out a
clear example of prudent debt capital
management, which other peers may
follow.” l
André Bonnal,
Crédit Agricole CIB
Insurer Phoenix sets $500m
landmark RT1, LM combo
5 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
In association with
The impact of the final Basel III reforms on European banks’
capital requirements remains unclear despite EU legislation
having been confirmed with application from 1 January 2025,
given limited disclosure from banks on their needs and the po-
tential for the market risk section to be delayed.
The final CRR3/CRD6 package has now gone through the
trilogue process and will be published in the Official Journal of
the EU later this month.
“The Basel III standards significantly strengthen the resil-
ience of the banking sector,” said Vincent Van Peteghem, Bel-
gian minister for finance. “The rules adopted today will ensure
that European banks can continue to operate in the face of eco-
nomic shocks.
“They will also make the banking sector more sustainable and
better able to deal with the green and digital transitions. This is
an important step towards deepening the Banking Union.”
However, speculation that the EU could seek to mitigate the
impact of implementation in light of possible delays in the US
has continued, albeit with limited room for manoeuvre follow-
ing passage of the package.
“Their hands are now pretty much tied,” says Alpesh Varsani,
executive director, DCM financial institutions, at Crédit Agri-
cole CIB, “but one area in which they can act is the Market Risk
section, where the Commission can avail itself of the power to
delay implementation by one year.”
The European Banking Authority previously found in its
September 2023 impact study that Market Risk will contribute
to a 1.3%-2.1% increase in capital requirements for large EU
banks.
Banks have already begun disclosing the expected day-one
impact of the package, but with transitional arrangements in
place until 1 January 2030 for some elements and as far out as 1
January 2033 for others, these are expected to be limited, with
Operational Risk initially a major driver.
“Banks are currently running with healthy levels of capi-
tal,” says Varsani, “and the current environment is conducive
to healthy capital build given the current levels of profitability.
The day-one impact is therefore not expected to be of much
concern.
“However, the longer term impact is yet to be seen.”
Indeed, EU banks have made only very limited disclosure as
to the full impact of the package.
“Although it’s not long until it kicks in,” says Varsani, “a long
transitionary regime is envisaged and banks don’t really have a
clear picture of what the rules are going to look like by 1 January
2033, so there’s very little information out there.”
While banks have been disclosing a day-one increase in
RWAs of some 5%, an EBA impact study forecast the fully-
loaded increase in capital requirements at 11.5%.
“There’s a big gap,” says Varsani. “The important question is,
at what point during the transition do these rules really start to
bite and capital or MREL needs start to increase.”
The biggest driver of the 11.5% increase will be the Output
Floor, constituting 7.4% percentage points on a fully-loaded ba-
sis, according to the EBA study.
“It is not expected to be binding for the majority of banks on
day one,” says Nicolas Tropini, DCM solutions and advisory at
Crédit Agricole CIB, “but it will start to bite for a large number
of banks once the Output Floor reaches the 70% mark. Once
the Output Floor becomes binding, the impact on banks’ com-
petitiveness and business mix will be felt, with the additional
impact of higher capital and MREL needs.”
The transitional regimes in CRR3 provide some meaningful
benefits for EU banks, including the possibility to use lower risk
weights on parts of mortgage exposures until the end of 2032.
However, the choice to apply this transitional regime will be at
the discretion of individual Member States, and it is anticipated
that not all will choose to apply this option.
A transitional regime also exists for unrated corporates, but
ultimately these will face a 100% risk weighting, potentially
leading to a significant impact on capital needs. However, two
moves could mitigate that effect, according to Tropini.
Firstly, the European Central Bank could approve the wider
use of the in-house credit assessment systems used by some
national central banks. Only that of the Banque de France is
currently approved for risk-weighting purposes, but accelerated
approval of others’ systems could drastically reduce the propor-
tion of unrated corporates in banks’ portfolios.
And secondly, rating agencies have developed tools that they
are offering banks to have a proxy for an external credit rating.
Banks are meanwhile exploring other RWA optimisation
measures, notes Varsani.
“The concept of synthetic risk transfer is starting to become
a topic again as we approach the implementation of the new
capital rules,” he says.
The Bank of England has meanwhile pushed back publication
of the UK’s version until after the recently-called July general
election. l
CRR3/CRD6 through but impact still unclear
Nicolas Tropini and Alpesh Varsani,
Crédit Agricole CIB
In conjunction with the recent bout of AT1 issuance, we have
seen a series of liability management (LM) exercises. What are
the latest regulatory developments affecting LM exercises in
the capital space?
Michael Benyaya, co-head of DCM solutions and advisory,
Crédit Agricole CIB: The European Banking Authority recent-
ly published a Q&A to clarify the treatment of the residual
amount of an instrument left outstanding after an LM exercise.
This covers own funds, i.e. AT1 and Tier 2, as well as eligible
liabilities, i.e. senior non-preferred and senior preferred eligible
for MREL and TLAC.
After an LM exercise, there always remains outstanding an
amount of the instrument in question — this can be a bigger
or smaller amount, of course, depending on the take-up dur-
ing the exercise. There has always been uncertainty over when
this unredeemed part of own funds or eligible liabilities can be
again included in the respective capital/MREL layer to which it
belongs after an LM exercise without replacement, i.e. a tender
offer. The EBA Q&A now provides full clarity to issuers.
The residual amount of an own funds or eligible liability
instrument no longer has to be deducted in the following
circumstances:
a) from the moment the permission expires (that is, once
the specified period of time for which the permission is
valid has passed) without the need for a permission to do
so;
b) following the competent authority’s withdrawal of the
permission (for example, as a result of an institution
breaching the criteria provided for the purposes of that
permission);
c) when the institution informs the competent authority in
writing that it no longer intends to use the permission.
The EBA also reaffirms that “sufficient certainty” is deemed
to exist only at the time of the announcement of the transaction.
In case of a tender offer combined with a new issue (simul-
taneous announcement to the market), the point in time for
the deduction corresponds to the date the new issuance is “ef-
fective” (i.e. the settlement date of the new issue). In this case,
an issuer will have to deduct the amount approved to be re-
purchased by the supervisor (e.g. the full amount in case of an
“any and all” tender) and then reintegrate the residual amount
outstanding at the end of the LM process (e.g. shortly after the
settlement date of the new issue/the tender on the old issue).
In a nutshell, the EBA is giving issuers a lot of flexibility by
providing additional visibility and certainty around that capital
treatment, allowing them in practice to add back that residual
amount post an LM exercise.
Doncho Donchev, executive director, DCM solutions and ad-
visory, Crédit Agricole CIB: This is another positive step in the
development of liability management for capital and MREL in-
struments. It is the latest in a series of EBA Q&As that have
helped to clear up the previous confusion around the timing
of deduction and reintegration of capital instruments in the
context of LM exercises. The combination of flexibility on the
timing of the deduction and on the residual amount is now
contributing to the number of LM exercises we are seeing. It
is moving from something that was seen as more exotic to a
standard refinancing practice for banks.
Another developing LM exercise topic over the years has been
in which “exceptional circumstances” issuers can call AT1 and
Tier 2 instruments within five years. What is the current state
of play?
Benyaya,CréditAgricoleCIB:The EBA has confirmed increased
flexibility on the interpretation of “exceptional circumstances”.
Previously the circumstances were truly exceptional, but now
they can include considerations relating to concentration of the
investor base, a need to free up lines, or the frequency of call
dates over 18-24 months, for example. However, cost alone can-
not be an exceptional circumstance.
Furthermore, they will leave this on a case-by-case basis —
this has been very much driven by the European Central Bank
and other supervisors who like to have this discretion, the abil-
ity to say no. The EBA will nevertheless monitor supervisory
practices and push supervisors to apply the same practices.
Donchev, Crédit Agricole CIB: While it may be helpful that the
ECB has shown more flexibility on this front, there are level
playing field issues to consider. It tends to grant the exceptional
circumstances exemption to recently-troubled banks of an O-
SII status and up to several hundred billion euros of balance
sheet size. But there is then a question as to where to draw the
line between those banks that qualify and those that don’t.
We continue to hear certain sceptical comments from authorities
about the function of AT1 instruments and their structure. Should
we expect any changes on this front?
Donchev, Crédit Agricole CIB: Indeed, we have heard from vari-
ous bodies — finance ministries, national central banks and
regulators — noises about AT1 not being fit for purpose, need-
ing reform, and making the rules much more stringent.
Firstly, in Europe, the rules cannot be changed by any na-
tional authority alone — they can only be changed at the EU
level. But this would also require new legislation to be passed
by all the relevant bodies — the Parliament, the Council, etc.
At this level of decision-making, maintaining international har-
monisation is seen as critical, and internationally there is no
real appetite for changing AT1 structures. So while it is a very
6 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
In association with
Regulatory Q&A: LM flexibility, AT1 chatter
interesting topic of discussion, the reality is that it will probably
lead to little actual movement.
The one exception is Switzerland, because it can go its own
way, and FINMA has its own views on the subject, so we need
to keep an eye on developments there.
Benyaya, Crédit Agricole CIB: Given the complexity of capital
requirements in Europe at various levels — Pillar 1, Pillar 2,
the leverage ratio, MREL, TLAC and so on — we are not sure
that it makes a lot of sense to review AT1 on its own. A review
of the structure would likely trigger a broader review of capital
requirements, which, for sure, would take time. Meanwhile, the
EBA and others have stressed the need for stability and visibility
in this market, for investors and issuers, alike. l
7 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024
In association with
This material has been prepared by a member of the Front Office department of Crédit Agricole Corporate and Investment
Bank or one of its affiliates (collectively “Crédit Agricole CIB”). Front Office personnel are not part of the research depart-
ment and this material does not constitute “Investment Recommendations” as defined under the Market Abuse Regula-
tions (MAR). It does not constitute research as considered by the Markets in Financial Instruments Directive II (MiFID II).
This material is provided for information purposes only. It is not to be construed as a solicitation or an offer to buy or sell
any financial instruments and has no regard to the specific investment objectives, financial situation or particular needs
of any recipient. It is not intended to provide legal, tax, accounting or other advice and recipients should obtain specific
professional advice from their own legal, tax, accounting or other appropriate professional advisers before embarking on
any course of action. The information in this material is based on publicly available information and although it has been
compiled or obtained from sources believed to be reliable, such information has not been independently verified and no
guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This
material may contain information from third parties. Crédit Agricole CIB has not independently verified the accuracy of
such third-party information and shall not be responsible or liable, directly or indirectly, for any damage or loss caused
or alleged to be caused by or in connection with the use of or reliance on this information. Information in this material is
subject to change without notice. Crédit Agricole CIB is under no obligation to update information previously provided to
recipients. Crédit Agricole CIB is also under no obligation to continue to provide recipients with the information contained
in this material and may at any time in its sole discretion stop providing such information. Investments in financial instru-
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herein (other than those that are identified as being historical) are indicative only and do not represent firm quotes as to
either price or size. Financial instruments denominated in a foreign currency are subject to exchange rate fluctuations,
which may have an adverse effect on the price or value of an investment in such products. None of the material, nor its
content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without the
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distribution to or use by, any person or entity domiciled or resident in any jurisdiction where such distribution, publication,
availability or use would be contrary to applicable laws or regulations of such jurisdictions. No liability is accepted by
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use of this material.
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mendation to effect any transactions in any security mentioned herein or an endorsement of any opinion expressed herein.
Recipients of this material in the United States wishing to effect a transaction in any security mentioned herein should do
so by contacting Credit Agricole Securities (USA), Inc.
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Sustainable-Development-Goals-presentation-by-Office-of-National-Statistics.ppt
 

BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association with Crédit Agricole CIB

  • 1. Trepidation showed signs of turning into capitulation on Friday as dislocations began to crystalise in the face of the sur- prise French election, which overshad- owed 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 Emma- nuel 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 be- forehand 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 con- tender, the leftist Front Populaire coali- tion that is also ahead of Macron’s party, similarly feared. The widening accelerated into Friday, prompting French agency Sfil to post- pone 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 inves- tors are demanding to own French gov- ernment 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 resur- gence of flight-to-quality trades. “Hopefully we find a catalyst for stabi- lisation 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 major- ity in the National Assembly in a matter of weeks is monumental,” said Hoarau, “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 big- gest 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 be- fore 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 Hoa- rau, “and as soon as markets settle down with less instability, issuers, particularly corporates, may well force through trades Macron puts Powell in the shade as markets recoil at prospect of RN, torpedoing supply 1 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 Having been caught off guard by Macron’s Sunday night gamble, markets’ reaction to the risks this threatens to unleash were initially modest, but fears escalated through the week such that by Thursday they were overshadowing what had hitherto been flagged as the macro event of Q2. Neil Day reports on the fall-out, with insights from Crédit Agricole CIB syndicate, trading and research. In association with Bank+InsuranceHybridCapital Briefing 16 JUNE 2024 Inside: RN potential in focus — page 3 Phoenix landmark — page 4 CRR3/CRD6 through, but impact still unclear — page 5 LM, AT1 updates — page 6
  • 2. 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 unchar- tered 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 Je- rome 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 mar- ket was pretty much setting itself up for a summer grind,” said William Rabi- cano, director, credit trading at Crédit Agricole CIB. “Investors are still long li- quidity 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 posi- tive momentum to successfully issue cap- ital instruments upon exiting blackout periods in early May, with both Santand- er and Erste Group selling AT1 on 7 May. At €1.5bn, the Spanish bank’s perpet- ual 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 is- sue 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. “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 San- paolo 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 big- gest book in the series of euro AT1, at- tracting some €9bn of orders to a €1.5bn 8.125% perpetual non-call 5.8, tighten- ing 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 Ah- mad, 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 inter- estingly they saw a lot of take-up in the US, not just Europe.” The strong AT1 supply was accom- panied 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, imply- ing 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 Com- monwealth Bank of Australia was able to match the following day on a €1bn 10 non-call five Tier 2. l 2 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 In association with MAN CANNOT DISCOVER NEW OCEANS UNLESS HE HAS THE COURAGE TO LOSE SIGHT OF THE SHORE Bloomberg: € = BGCS2 Global Directory = BGCP
  • 3. 3 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 In association with “The example of the 1997 dissolution — the only true dissolution — should prevent future presidents from using this weapon carelessly.” Last Sunday it became evident that Emmanuel Macron had not learned the lesson that French presidents would be wise to avoid the miscalculation of Jacques Chirac — as portentously flagged by Crédit Agricole CIB economists back in 2021 — when he dramatically set France on a course that has left large parts of its population, neighbours and financial markets fret- ting about the future. With the Rassemblement National (RN) coming first with 31.37% of votes in European elections, and Macron’s centrist Ensemble coalition on just 14.6%, the prospect of defeat for France’s traditional parties by the far-right RN after first and second rounds of voting on 30 June and 7 July, respectively, is likely, according to Valentin Giust, global macro strategist at Crédit Agricole CIB. Indeed, his central scenario is a substantial majority for the RN, with an absolute majority only just shy of being the base case. “There are unquantifiable factors and uncertainties — voter turnout, candidates who drop out of three-way races, correla- tions between first-round scores and second-round gains — that mostly create upside for the RN in terms of the final results versus the central scenario,” he says. This is despite early polls not reflecting the factional ma- noeuvring that occurred this week and thus being of questiona- ble value, not to mention the unprecedented political backdrop. For example, it has been suggested that Macron had expected to benefit from the left being dispersed, as was the case in the Eu- ropean elections, but its parties have quickly coalesced to form the Front Populaire bloc, whose combined European vote share was ahead of Ensemble. As well as flagging this miscalculation, Louis Harreau, head of developed markets macro and strategy at Crédit Agricole CIB, is sceptical of suggestions Macron was seeking to lay a trap for the RN by calling an election it could realistically win. The argument is that the RN would struggle to maintain its popular- ity in government, leading to a loss to Macron’s party in 2027 presidential elections. “We have our doubts about this strategy, to be honest, as it would mean that Macron hopes that France would be in a dire situation in three years’ time,” says Harreau. The prospect of the 2025 budget facing a no-confidence vote in September and impending general political gridlock are deemed the most practical reasons for Macron’s gamble. But markets are now faced with pricing in a RN budget and considering whether the president’s purported prediction may come to pass. Based on the economic platform it put forward in 2022 presidential and legislative elections, but taking into account the current context, Giust and Harreau reckon that an RN pro- gramme would imply a spending hike of around 2% and fiscal relief of more than 1% of GDP, with some one-offs adding to the deficit in its first year. They calculate that, if fully implemented, it would result in deficits of 6%-10% of GDP per year over the next five years, pushing French public debt towards 128% of GDP by 2028. “Cautious conclusions should prevail due to the very limited visibility on RN’s economic priorities as well as its future leeway to enforce them,” says Harreau. “In addition, the latest speeches by RN leaders point to a need for fiscal consolidation and call into question some measures, e.g. pension reform. “A few key measures could offer RN a substantial political return at a manageable budget cost (i.e. below an additional 1ppt of GDP per year of deficit),” adds Giust. “Of course, these projections are subject to extreme caution, not only because of the action of the government, but also because of the change in the economic outlook and of the potential change in the cost of debt.” Giust and Harreau nevertheless warn that RN’s economic programme, if implemented in full, is likely to significantly in- crease doubts around France’s ability to sustain its public debt. “This situation would have the potential to trigger signifi- cant tensions on French assets — and some European assets.” While acknowledging that the RN could adopt a more prag- matic stance in light of this, and also to set itself up for the 2027 presidential election, they highlight the potential hit to France’s funding costs and potential knock-on effects. “In this context, the uncertainty regarding France’s public finance outlook will remain extremely high until the election, but also until the new government — if it is an RN government — shows how it intends to govern: in line with its promises or with pragmatism.” Clarity on the RN’s ambitions should develop after the cam- paign officially starts tomorrow (Monday). The new National Assembly is scheduled to gather on 18 July, with a new prime minister potentially in place in time for the start of the Paris Olympics on 26 July. l A ‘dire situation’? RN potential in focus Valentin Giust and Louis Harreau, Crédit Agricole CIB
  • 4. 4 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 In association with UK insurer Phoenix Group Holdings is- sued the first US dollar Restricted Tier 1 instrument since October 2021 on 6 June, a $500m perpetual-six year issue that in conjunction with a tender offer marked a novel opportunity for inves- tors to roll outstanding RT1 holdings into a new on-the-run RT1. While several insurance companies have eyed RT1 to potentially refinance grandfathered Tier 1 instruments as an alternative to Tier 2, where they may have insufficient headroom, Phoenix approached the market ahead of an RT1 call next year with the new issue and tender. The package was announced on Wednesday, 5 June, teeing up a new $500m (£390m, €460m) no-grow perpetual-six year Reg S issue, expect- ed rating BBB+ (Fitch), and launching a capped tender offer for its outstand- ing $750m 5.625% perpetual non-call 2025 RT1 and a $500m 4.75% 2031 non-call 2026 Tier 2, of which $350m was outstanding. “The issuer adopted a very investor- friendly approach, in allowing investors the possibility to roll into a new RT1 with an on-the-run coupon,” said André Bonnal, FIG syndicate at joint bookrun- ner Crédit Agricole CIB. “Subordinated insurance was rela- tively active in Q1, specifically in RT1 with the Axa reopening at the start of the year,” he added, “but it is good to see further RT1 issuance, this time in US dollars, among the flurry of subor- dinated insurance deals and alongside the bank capital activity, with the tender and new issue combo also in line with the AT1 trend we have been seeing.” Following investor calls, Phoenix’s leads the next day went out with initial price thoughts of the 8.5% area for the perpetual-six year issue. After around two hours and 40 minutes, they report- ed books above $1bn, and after around three hours and 10 minutes, they set the spread at 8.5% on the back of books above $1.15bn, pre-reconciliation and including $50m of joint lead manager interest. Some $775m of orders were good at re-offer, which implied a new issue premium in the context of 12.5bp- 25bp. The deal reopened the US dollar RT1 market after a hiatus since October 2021, when compatriot Rothesay sold the last such instrument. “This was an interesting trade be- cause we hadn’t seen any US dollar RT1 supply for a very long time,” said Bonnal. “That meant the process was always going to involve a high degree of price discovery. “Furthermore, all the bonds issued in 2021 were sold in a very different rates paradigm, so had very low coupons, re- sets and cash prices.” Ahead of Phoenix’s announcement, Rothesay Life on 3 and 4 June issued sterling and US dollar Tier 2, respec- tively, the latter a $325m 7% 2034 10.25 non-call 5.25 rated Baa1/BBB+ (Moody’s/Fitch). Bonnal said that while Asian investors among the audience for Phoenix’s new RT1 were considering potential pricing above the 8% mark in the context of dollar AT1s with at least one investment grade rating trading in the high 7s, European investors — pre- dominantly UK accounts familiar with the credit — were more likely to use the Rothesay Tier 2 as a reference, factoring in an RT1-Tier 2 differential of 150bp or more. These dynamics contributed to the pricing at 8.5%. “Pricing 150bp back of Rothesay Tier 2, i.e. where UK institutional investors saw fair value, is a strong outcome,” said Bonnal, “and the issuer is clearly happy. “It represents a successful reopening of the dollar RT1 market. And through the tender they have been able to buy back a substantial amount of the out- standing RT1.” The tender offer was for up to the amount of the new issue and prioritised the outstanding RT1 over the Tier 2, and on Friday (14 June) Phoenix announced that it had accepted $500m of the RT1, at a purchase price of 100.00, meaning none of the Tier 2 was bought back. Jakub Lichwa, portfolio manager at TwentyFour Asset Management, said af- ter Phoenix’s new issue that the overall exercise was notable and welcome in hopefully being the first step in insur- ance companies building up a track record of calling RT1s at their first call date — like banks with their AT1s — thereby potentially driving performance of the asset class. “We would also note that the $500m redemption (via tender at par) is coming in over six months ahead of the sched- uled call date,” he said. “This removes further uncertainty around the call, and demonstrates a proactive approach from Phoenix towards its debt capital instruments. “Again, it is still too early to argue that this will become a trend, but in- evitably Phoenix’s approach lays out a clear example of prudent debt capital management, which other peers may follow.” l André Bonnal, Crédit Agricole CIB Insurer Phoenix sets $500m landmark RT1, LM combo
  • 5. 5 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 In association with The impact of the final Basel III reforms on European banks’ capital requirements remains unclear despite EU legislation having been confirmed with application from 1 January 2025, given limited disclosure from banks on their needs and the po- tential for the market risk section to be delayed. The final CRR3/CRD6 package has now gone through the trilogue process and will be published in the Official Journal of the EU later this month. “The Basel III standards significantly strengthen the resil- ience of the banking sector,” said Vincent Van Peteghem, Bel- gian minister for finance. “The rules adopted today will ensure that European banks can continue to operate in the face of eco- nomic shocks. “They will also make the banking sector more sustainable and better able to deal with the green and digital transitions. This is an important step towards deepening the Banking Union.” However, speculation that the EU could seek to mitigate the impact of implementation in light of possible delays in the US has continued, albeit with limited room for manoeuvre follow- ing passage of the package. “Their hands are now pretty much tied,” says Alpesh Varsani, executive director, DCM financial institutions, at Crédit Agri- cole CIB, “but one area in which they can act is the Market Risk section, where the Commission can avail itself of the power to delay implementation by one year.” The European Banking Authority previously found in its September 2023 impact study that Market Risk will contribute to a 1.3%-2.1% increase in capital requirements for large EU banks. Banks have already begun disclosing the expected day-one impact of the package, but with transitional arrangements in place until 1 January 2030 for some elements and as far out as 1 January 2033 for others, these are expected to be limited, with Operational Risk initially a major driver. “Banks are currently running with healthy levels of capi- tal,” says Varsani, “and the current environment is conducive to healthy capital build given the current levels of profitability. The day-one impact is therefore not expected to be of much concern. “However, the longer term impact is yet to be seen.” Indeed, EU banks have made only very limited disclosure as to the full impact of the package. “Although it’s not long until it kicks in,” says Varsani, “a long transitionary regime is envisaged and banks don’t really have a clear picture of what the rules are going to look like by 1 January 2033, so there’s very little information out there.” While banks have been disclosing a day-one increase in RWAs of some 5%, an EBA impact study forecast the fully- loaded increase in capital requirements at 11.5%. “There’s a big gap,” says Varsani. “The important question is, at what point during the transition do these rules really start to bite and capital or MREL needs start to increase.” The biggest driver of the 11.5% increase will be the Output Floor, constituting 7.4% percentage points on a fully-loaded ba- sis, according to the EBA study. “It is not expected to be binding for the majority of banks on day one,” says Nicolas Tropini, DCM solutions and advisory at Crédit Agricole CIB, “but it will start to bite for a large number of banks once the Output Floor reaches the 70% mark. Once the Output Floor becomes binding, the impact on banks’ com- petitiveness and business mix will be felt, with the additional impact of higher capital and MREL needs.” The transitional regimes in CRR3 provide some meaningful benefits for EU banks, including the possibility to use lower risk weights on parts of mortgage exposures until the end of 2032. However, the choice to apply this transitional regime will be at the discretion of individual Member States, and it is anticipated that not all will choose to apply this option. A transitional regime also exists for unrated corporates, but ultimately these will face a 100% risk weighting, potentially leading to a significant impact on capital needs. However, two moves could mitigate that effect, according to Tropini. Firstly, the European Central Bank could approve the wider use of the in-house credit assessment systems used by some national central banks. Only that of the Banque de France is currently approved for risk-weighting purposes, but accelerated approval of others’ systems could drastically reduce the propor- tion of unrated corporates in banks’ portfolios. And secondly, rating agencies have developed tools that they are offering banks to have a proxy for an external credit rating. Banks are meanwhile exploring other RWA optimisation measures, notes Varsani. “The concept of synthetic risk transfer is starting to become a topic again as we approach the implementation of the new capital rules,” he says. The Bank of England has meanwhile pushed back publication of the UK’s version until after the recently-called July general election. l CRR3/CRD6 through but impact still unclear Nicolas Tropini and Alpesh Varsani, Crédit Agricole CIB
  • 6. In conjunction with the recent bout of AT1 issuance, we have seen a series of liability management (LM) exercises. What are the latest regulatory developments affecting LM exercises in the capital space? Michael Benyaya, co-head of DCM solutions and advisory, Crédit Agricole CIB: The European Banking Authority recent- ly published a Q&A to clarify the treatment of the residual amount of an instrument left outstanding after an LM exercise. This covers own funds, i.e. AT1 and Tier 2, as well as eligible liabilities, i.e. senior non-preferred and senior preferred eligible for MREL and TLAC. After an LM exercise, there always remains outstanding an amount of the instrument in question — this can be a bigger or smaller amount, of course, depending on the take-up dur- ing the exercise. There has always been uncertainty over when this unredeemed part of own funds or eligible liabilities can be again included in the respective capital/MREL layer to which it belongs after an LM exercise without replacement, i.e. a tender offer. The EBA Q&A now provides full clarity to issuers. The residual amount of an own funds or eligible liability instrument no longer has to be deducted in the following circumstances: a) from the moment the permission expires (that is, once the specified period of time for which the permission is valid has passed) without the need for a permission to do so; b) following the competent authority’s withdrawal of the permission (for example, as a result of an institution breaching the criteria provided for the purposes of that permission); c) when the institution informs the competent authority in writing that it no longer intends to use the permission. The EBA also reaffirms that “sufficient certainty” is deemed to exist only at the time of the announcement of the transaction. In case of a tender offer combined with a new issue (simul- taneous announcement to the market), the point in time for the deduction corresponds to the date the new issuance is “ef- fective” (i.e. the settlement date of the new issue). In this case, an issuer will have to deduct the amount approved to be re- purchased by the supervisor (e.g. the full amount in case of an “any and all” tender) and then reintegrate the residual amount outstanding at the end of the LM process (e.g. shortly after the settlement date of the new issue/the tender on the old issue). In a nutshell, the EBA is giving issuers a lot of flexibility by providing additional visibility and certainty around that capital treatment, allowing them in practice to add back that residual amount post an LM exercise. Doncho Donchev, executive director, DCM solutions and ad- visory, Crédit Agricole CIB: This is another positive step in the development of liability management for capital and MREL in- struments. It is the latest in a series of EBA Q&As that have helped to clear up the previous confusion around the timing of deduction and reintegration of capital instruments in the context of LM exercises. The combination of flexibility on the timing of the deduction and on the residual amount is now contributing to the number of LM exercises we are seeing. It is moving from something that was seen as more exotic to a standard refinancing practice for banks. Another developing LM exercise topic over the years has been in which “exceptional circumstances” issuers can call AT1 and Tier 2 instruments within five years. What is the current state of play? Benyaya,CréditAgricoleCIB:The EBA has confirmed increased flexibility on the interpretation of “exceptional circumstances”. Previously the circumstances were truly exceptional, but now they can include considerations relating to concentration of the investor base, a need to free up lines, or the frequency of call dates over 18-24 months, for example. However, cost alone can- not be an exceptional circumstance. Furthermore, they will leave this on a case-by-case basis — this has been very much driven by the European Central Bank and other supervisors who like to have this discretion, the abil- ity to say no. The EBA will nevertheless monitor supervisory practices and push supervisors to apply the same practices. Donchev, Crédit Agricole CIB: While it may be helpful that the ECB has shown more flexibility on this front, there are level playing field issues to consider. It tends to grant the exceptional circumstances exemption to recently-troubled banks of an O- SII status and up to several hundred billion euros of balance sheet size. But there is then a question as to where to draw the line between those banks that qualify and those that don’t. We continue to hear certain sceptical comments from authorities about the function of AT1 instruments and their structure. Should we expect any changes on this front? Donchev, Crédit Agricole CIB: Indeed, we have heard from vari- ous bodies — finance ministries, national central banks and regulators — noises about AT1 not being fit for purpose, need- ing reform, and making the rules much more stringent. Firstly, in Europe, the rules cannot be changed by any na- tional authority alone — they can only be changed at the EU level. But this would also require new legislation to be passed by all the relevant bodies — the Parliament, the Council, etc. At this level of decision-making, maintaining international har- monisation is seen as critical, and internationally there is no real appetite for changing AT1 structures. So while it is a very 6 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 In association with Regulatory Q&A: LM flexibility, AT1 chatter
  • 7. interesting topic of discussion, the reality is that it will probably lead to little actual movement. The one exception is Switzerland, because it can go its own way, and FINMA has its own views on the subject, so we need to keep an eye on developments there. Benyaya, Crédit Agricole CIB: Given the complexity of capital requirements in Europe at various levels — Pillar 1, Pillar 2, the leverage ratio, MREL, TLAC and so on — we are not sure that it makes a lot of sense to review AT1 on its own. A review of the structure would likely trigger a broader review of capital requirements, which, for sure, would take time. Meanwhile, the EBA and others have stressed the need for stability and visibility in this market, for investors and issuers, alike. l 7 BANK+INSURANCE HYBRID CAPITAL 16 JUNE 2024 In association with This material has been prepared by a member of the Front Office department of Crédit Agricole Corporate and Investment Bank or one of its affiliates (collectively “Crédit Agricole CIB”). Front Office personnel are not part of the research depart- ment and this material does not constitute “Investment Recommendations” as defined under the Market Abuse Regula- tions (MAR). It does not constitute research as considered by the Markets in Financial Instruments Directive II (MiFID II). This material is provided for information purposes only. It is not to be construed as a solicitation or an offer to buy or sell any financial instruments and has no regard to the specific investment objectives, financial situation or particular needs of any recipient. 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