A happy conjunction of yield-hungry investors and regulatory clarity over tier two has driven a mini-boom of subordinated debt supply in recent months.
It has been sorely needed. The waves of lower tier two paper sold in the market’s pre-crisis heyday are hitting their first call dates. Meanwhile, the prospect of bail-in is making senior unsecured investors keener than ever to see a nice, fluffy cushion of capital below them.
Investors have been just as happy to see the supply. With yields over 6% in some cases, the returns are attractive.
But while the volumes may be high compared to the dearth of tier two supply seen in 2011, it is unlikely they will continue to accelerate. A return to it being another flow product — it was not uncommon to see half a dozen deals per week in 2006 and 2007 — is not on the horizon.
For a start, the deals seen this year are still somewhat bespoke. Each borrower has tweaked the structure just a little to suit its own needs or the demands of its regulator. That means secondary liquidity is hampered by investors rummaging through the prospectus each time they think of picking up a clip. Volumes cannot take off until there is greater consensus over structures.
Worries over the periphery are, meanwhile, limiting the universe of issuers that might look at printing subordinated debt. When Spanish and Italian banks are paying spreads of over 300bp for senior unsecured funding, tier two becomes an expensive proposition.
In any case, the need for tier two paper may have been exaggerated. Billions of euros worth of such paper is hitting its first call date, but not all of that will be redeemed. Previously, amortising regulatory treatment encouraged issuers to call notes five years before their final maturity. That remains, but the paper — often with cheap post-call coupons — now has a renewed usefulness beyond the call date as a bail-in buffer.
The other reason not to set up that tier-two focused fund just yet, of course, is that Europe is still mired in crisis. With Moody’s due to rule on Spain’s sovereign rating in the coming days, as well as elections ahead and stagnant growth worrying investors, the risk of the market simply shutting down to all FIG issuance for months on end is still real.