December 16, 2016 / 2:55 PM / a year ago

French duo raise curtain on new-style senior

* Credit Agricole, Societe Generale issue first senior non-preferreds

* Deals provide blueprint for other banks across Europe

By Alice Gledhill

LONDON, Dec 16 (IFR) - Investors flooded Credit Agricole and Societe Generale with more than 8.5bn of orders for a new kind of senior bond that will sit at the heart of regulators’ efforts to draw a line under the too-big-to-fail problem.

With ink barely dry on the enabling Sapin II law, the two French banks gave senior non-preferred the strong start it needed, printing a combined 2.5bn.

“You never know when you launch a new type of debt,” said Vincent Robillard, head of group funding at SG.

“But we were confident - feedback we’d received on a worldwide basis was very positive. Investors were waiting for this new type of debt and had a very good understanding of it. The way it is structured is very clear.”

The trades are viewed as the key to unlocking a new wave of loss-absorbing senior debt to be issued by European banks as they square up to incoming rules demanding larger stacks of debt to absorb losses in a crisis.

France was ahead of the game in proposing so-called senior non-preferred bonds at the end of 2015, though the European Commission steered other jurisdictions in that direction last month.

“We expect NPS [non-preferred senior] to become the most important class of senior debt,” Commerzbank analysts wrote in a note this week. “The way forward for all other EU countries is now clear.”


The trades’ reception gives a shot of confidence to a market that could see up to 550bn of issuance in the next four to five years, according to Morgan Stanley estimates.

Despite speculation that the banks might kick off in US dollars, where the market for loss-absorbing senior is more entrenched, both opted for euros.

Credit Agricole priced a 1.5bn 1.875% 10-year (Baa2/BBB+/A) at swaps plus 115bp, and Societe Generale a 1bn 1% long five-year (Baa3/BBB+/A) at swaps plus 90bp, both around 15bp inside initial price thoughts.

Credit Agricole considered all options in terms of maturity and currency but “everyone was screaming for a euro trade”, said Vincent Hoarau, head of FIG syndicate at Credit Agricole, which acted as sole bookrunner. Commerzbank, Goldman Sachs, HSBC, JP Morgan and Natixis were joint leads.

“Being a French bank, it was a little bit more natural to open up the domestic market before doing dollars, though feedback was extremely positive across the board and the pricing difference was marginal,” he said.

Credit Agricole and SG reckoned they paid respective premiums of around 30bp and 37bp-40bp over their traditional senior bonds, with a 10bp-15bp new issue concession on top. The SG note was more than 7bp tighter by Friday, when Credit Agricole’s was bid just inside reoffer.

Some funding teams had guided towards 30bp as a potential clearing level, said Gildas Surry, a senior analyst at Axiom Alternative Investments.

“That sounds reasonable for large and diversified balance sheets like BNP Paribas,” said Surry. “It comes down to the fundamentals. Spread compression will be gradual as the asset class grows, and individual issuers build up the thickness of this new layer.”


French banks remain the prime candidates for further senior non-preferred issuance while other jurisdictions set about implementing the requisite legal framework.

Despite Credit Agricole’s lightning-fast reaction, its issuance target - a combined 12bn in non-preferred senior and Tier 2 debt by 2019 - is dwarfed by the needs of BNP Paribas, which intends to print 30bn of the new-style senior debt over that period. Societe Generale needs to issue less than 10bn.

“Being the first mover allows to capture the potential demand to its fullest capacity,” said Surry. “BNP Paribas may attract less momentum on following Credit Agricole and now Societe Generale.”

UniCredit on Tuesday signalled its intention to issue senior non-preferred debt in the coming years, but said issuance would be “more back-ended” given concerns around potential delays in the recognition of unpreferred instruments in Italian national legislation.

“Senior unpreferred issuance will become available once there is a clear guidance on the harmonised approach from the Commission,” said CFO Mirko Bianchi at the bank’s investor day on Tuesday.

But banks eager to make dents in their loss-absorbing targets could try to pre-empt the legal changes, bankers said, issuing either contractually subordinated senior debt - like Nykredit’s senior resolution notes sold earlier this year - or preferred senior debt that could switch into senior non-preferred format at a later date.

“I guess you might see that if you saw a delay around the legislative decision,” said a banker. “But I think most people would rather keep it simple and clean.”

Reporting by Alice Gledhill, editing by Helene Durand, Julian Baker, Matthew Davies

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