Societe Generale Tests First Bail-In Bonds in a Nordic CurrencyBy
Swedish krona MREL note issued in response to investor demand
Swedish regulators have yet to finalize rules for MREL notes
While Scandinavia waits for its regulators to finalize rules on bonds that are supposed to absorb losses if issuing banks get into trouble, Societe Generale SA has decided to lead the way and sell its first senior bail-in-able notes in a Nordic currency.
France’s second-largest bank by market value is issuing senior non-preferred notes in Swedish kronor after already having sold such debt in euros and dollars, Vincent Robillard, head of group funding, said in a phone interview.
“We decided to launch this inaugural bond” following demand from the local Nordic investor base, he said. “We were confident in our capacity to issue a benchmark-sized transaction.”
The note will be the first of its kind in a Nordic currency and will form part of an issuance plan at Societe Generale that may reach 10 billion euros ($10.7 billion) in such securities “across all currencies” by the end of 2018, Robillard said.
Across Europe, banks may need to raise up to 276 billion euros in funding to comply with minimum requirements for own funds and eligible liabilities, or MREL. The estimate, which is from the European Banking Authority, covers banks representing two-thirds of the industry. Most lenders expect to roll over senior unsecured debt into the new instruments. The EBA says the outlook for MREL issuance is “uncertain.”
Societe Generale, which issued its first senior non-preferred notes in December, on Wednesday sold 750 million kronor ($84 million) in the securities, maturing in five years. The notes were priced at a coupon of 120 basis points above the three-month Stockholm inter-bank rate.
France pioneered the model of creating a new class of senior debt to deal with rules meant to shield taxpayers from financial crises. While the French have tried to protect banks’ senior unsecured creditors, the investor class will be subordinated in Germany. The EU’s financial services chief, Valdis Dombrovskis, said in November the bloc wants to introduce a more standardized framework for the notes.
Sweden is set to reveal guidelines at the beginning of 2017. Signals from Swedish authorities to date point to high levels for MREL and a subordination requirement. Assuming that holds, potential issuance at Sweden’s four biggest banks could reach 657 billion kronor, most likely to be issued in euros and dollars, according to Danske Bank.
A substantial chunk of new bail-in bonds may come from Scandinavia, Danske says. In an extreme scenario, which assumes local regulators set the toughest criteria, the region’s lenders may need to find investors for more than $120 billion in notes to comply with MREL, according to calculations by Danske. Minimum issuance of these new kinds of bonds would be around $80 billion, it says.
Even without clear regulatory guidelines in Scandinavia, there are already signs that investor appetite is growing.
“This new Tier 3 asset class is really the name of the game in Europe right now, and we expect much more to come,” said Thomas Hovard, Danske’s head of credit research. “French banks have started this new issuance trend, but we expect most other countries to follow suit.”
Hovard said he expects Swedish banks to issue senior non-preferred notes in the second half of the year.
Robillard said investors buying bail-in bonds are getting value for money.
“The legal and financial level of protection this debt has is high, as it remains senior debt and bail-ins couldn’t start before the point of non-viability with a full protection,” he said. “In addition, the premium paid for this new senior debt makes the yield interesting for investors.”