Non-preferred senior by any other name
It is all very well pressing to harmonise bank resolution frameworks across Europe, but the market has to get on with harmonising the terminology as well.
With French banks already issuing ‘senior’ bonds that will count towards the minimum requirement for own funds and eligible liabilities (MREL), it seems like a new era has finally begun for European bank liability structures.
And after a little contractual wrangling from Santander and Nykredit Realkredit, the path is open for more financial institutions to issue MREL-eligible senior, even before the necessary changes have been made in national legislation.
That might not be too appealing to smaller banks. They still have plenty of time to build towards their MREL buffers, even if regulators are keen to create a large market as quickly as possible to make sure future bank resolutions take place with little legal fuss or bondholder outrage.
But there is an urgent question begging for an answer. What on Earth should these new bonds be called?
Names shape identity — from people to companies to political parties to “bank bonds that in a resolution are meant to be subject to bail-in before ordinary senior unsecured instruments but after additional tier one and tier two capital”.
Clearly, there’s a lot of meaning to condense into a snappy name, but one thing is already clear — the word ‘senior’ is going to have to be included somewhere in the title.
‘Tier three’ had initially seemed like a suitable term for the new debt class, given that it was a logical follow-on from the tier one and tier two bonds that would rank below it in the bail-in capital structure.
But the suggestion has been pushed aside, as arranging banks and issuers have been keen to stress that the asset class has more in common with traditional senior bonds than it does with any properly subordinated product, even if it explicitly absorbs losses and is no longer at the top of the bank liability structure.
By the same logic, ‘ junior senior ’ should also be dropped. Moody’s likes the name, but many a banker has derided it as a contradiction in terms, and there is a small chance it could infringe upon on the intellectual property rights of a Danish musical duo.
And speaking of Denmark, Nykredit Realkredit has some claim on the naming of an asset class it helped create. When the bank issued the first contractually bail- inable senior bonds last year it went for ‘senior resolution notes’ and has stuck with the moniker in its recent announcements.
Equally, Santander has advanced ‘ second ranking senior’ as a name for its innovative and pre-emptive loss-absorbing senior bonds.
But it is France’s favoured terminology — non-preferred senior — that is leading the way in becoming the market norm.
It is not just that France was the first country to change its national law to ensure its global systemically important banks (G-Sibs) can get on with their total loss-absorbing capacity (TLAC) requirements. The European Commission likes the name enough to include it in its recent proposal on harmonising bank resolution frameworks across Europe.
The move has also given the name a bit of a following elsewhere in Europe, as Germany seeks to make it clear that the Commission is using a blanket term that will encompass the statutorily subordinated senior debt issued by German banks, as well as French banks’ new bonds and the holding company level instruments issued in the UK, in Switzerland, and by select banks in other parts of Europe.
But the term ‘non-preferred’ is a bit clumsy, and it is never particularly elegant to define something as a negation of what it is not. It has also been initialised as ‘SNP’, causing a great deal of confusion for some British market participants that may have been wondering what could possibly have been going on in Scottish politics.
GlobalCapital would instead like to propose calling the fledgeling asset class by a different and new(ish) name: ‘lower senior’.
Lower senior debt as opposed to upper senior debt, which would readily apply to the traditional, vanilla senior unsecured format.
We have been here before, of course, with upper and lower tier twos, and perhaps it is a little unfortunate to be harking back to an already neglected set of instruments. But the term would describe the new world order accurately, without taking away the cherished “senior” label.
What is more, ‘lower senior’ is easier to say than ‘non-preferred senior’ and — crucially for this journalist — just that little bit simpler to write.