Credit Agricole Tier 1 Deal Seen Heralding $68 Billion FloodJohn Glover
Credit Agricole SA’s planned issue of junior subordinated bonds is the first foray this year into a market that may grow by as much as $68 billion, with banks taking advantage of investors’ need for yield to build capital.
“There’s a capital arms race going on,” said A.J. Davidson, head of hybrid capital at Royal Bank of Scotland Group Plc in London, who expects issuance of as much as 50 billion euros ($68 billion) this year. “As long as the market is receptive, banks will try to issue as much as they can, as soon as they can.”
The European Union is bringing in rules to make investors in banks, rather than taxpayers, take losses when lenders need to be bailed out. As part of that move, debt instruments used in banks’ capital structures, such as additional Tier 1 notes, have been redesigned to ensure they can be impaired without provoking a default.
France’s third-biggest lender hired banks to arrange investor meetings beginning Jan. 9, according to a person with knowledge of the deal. An issue of additional Tier 1 bonds may follow, said the person, who asked not to be named because they’re not authorized to talk about it.
Issuance of the securities began at the end of April last year, when Banco Bilbao Vizcaya Argentaria SA announced the sale of $1.5 billion of the securities, paying 9 percent.
About $10.8 billion of the notes have been issued publicly so far, denominated in dollars and euros. Barclays Plc priced 1 billion euros of notes to yield 8 percent note in December, while Banco Popular Espanol SA is paying 11.5 percent, the highest coupon so far, on 500 million euros of the debt it issued in October.
The yield premium investors demand to hold Bilbao, Spain-based BBVA’s additional Tier 1 securities has declined to 531 basis points more than benchmark Treasuries, from 769 basis points on May 9, when dealers began recording prices on Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The securities are designed to be the riskiest form of bank debt, because they are undated and payment of coupons is at the issuer’s discretion. Regulators can veto part or all of the interest payments if an issuer’s losses erode equity, while they can also be written down or converted into stock if preset triggers on capital ratios are breached.
‘Dash for Trash’
“For now at least, it’s a dash for trash,” said Matt King, global head of credit strategy at Citigroup Inc. in London. “The trashier it is, the more people will like it.”
Paris-based Credit Agricole hired its own investment bank with Barclays Plc, Credit Suisse Group AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and UniCredit SpA to arrange the the investor presentations, the person familiar said.
Societe Generale SA was the last European bank to issue additional Tier 1 debt, selling $1.75 billion of the securities on Dec. 11.
Analysts including Simon Adamson at CreditSights Inc. expect issuance to begin in earnest this year. Adamson estimates the total additional Tier 1 market over time may grow to about $345 billion.