Crédit Agricole tier two signals the TLAC race is on

Graham Bippart

March 11, 2015 11:45 am

The race to fill the Total Loss Absorbing Capacity ratio — before the final rule has even been set — has begun, it seems.

Beginning with Deutsche Bank and BNP Paribas in February and continuing with Société Générale, Santander and now Crédit Agricole, banks are finding a wealth of demand for 10 year or longer tier two bullet deals with an eye toward fulfilling the minimum 16% TLAC requirement solely with subordinated capital.

Crédit Agricole this week sold a two tranche jumbo tier two in dollars and euros, bringing in more than €16bn equivalent of orders for both and printing €3.4bn equivalent in total.

The bank wanted to get ahead of what it sees as a likely deluge of these kinds of deals in 2015.

Allied Irish Banks and Deutsche Bank opened up the senior market on Monday, followed by Yorkshire Building Society on Tuesday, all in euros. NN Group is set to sell its first senior unsecured bond on Wednesday, after having built a foundation in subordinated debt in 2014.

And Norway’s DNB Bank has mandated for a roadshow of its inaugural additional tier one. Citi, Deutsche Bank and JP Morgan will meet with investors beginning March 13 for a dollar denominated non-call five year bond.

Bankia and Hypo illustrate full 10 year spread range

The full range of 10 year covered bond spreads was on offer this week, as the market maintained primary momentum into the second week of March. Issuers from Germany, Finland, the UK and Spain issued benchmark deals that all got a great reception.

Muenchener Hypothekenbank issued the tightest ever 10 year covered bond on Monday with a book that was built in record time. And at €750m it was much larger than anything seen in Germany in this tenor for several years. Nordea Finland attracted almost equal interest for both tranches of its 5.25 year and 12 year covered bond that was priced with barely any new issue premium on Tuesday.

The UK’s Coventry Building Society spurned the conventional three year sterling floating rate covered bond sector, an, sold a five year FRN also on Tuesday. On Wednesday Bankia returned to the market for the first time in three years to launch a 10 year benchmark which, with a spread of 42bp, provided one of the highest covered bond yields this year.

Private to public in ABS

Securitizations on offer in the European market this week are demonstrating some of the headway the European Central Bank’s ABS purchase programme (ABSPP) has made in bringing paper to market that without the prevailing environment of compressed spreads may never have reached investors’ hands.

The latest periphery lender to break the post-crisis trend of privately placed and retained transactions is Mediobanca, which will begin a pan-European roadshow on Friday for an Italian consumer secured loan ABS transaction from its Quarzo platform, its first securitization since 2011.

Increased risk appetite is also fuelling the sale of more deeply subordinated notes. Bluestone is looking to sell up to seven tranches of notes, down to a single-B rating, in its first securitization of Basinghall Finance mortgages.

However, there remain concerns over the adverse effects of the ECB’s intervention. Barclays has calculated that it will have the unwelcome effect of pushing some investors out of the market, as investor-placed supply in the ABSPP-eligible portion of the market turns net negative this year and next.