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FIGSenior Debt

The TLTRO clock is ticking

Close up clock face at 12 O'Clock

Banks would be prudent to make the most of funding windows as they appear

Banks must prepare themselves as this round targeted longer-term refinancing operations (TLTRO) inches towards a pair of major deadlines later this year.

On June 23, the present favourable rate of minus 1% on selected TLTRO holdings is set to end. Eurozone lenders are allowed to draw down their TLTRO funding at this lower rate — 50bp below the ECB’s deposit rate — if they meet certain conditions around lending to businesses and consumers.

Meanwhile, the largest of the ten TLTRO tranches, its fourth incarnation, is set to begin losing its regulatory eligibility as it enters the final year of its life that same month. Eurozone firms borrowed €1.31tr when this funding was first offered in June 2020, and they have paid back €91bn.

These assets are weighted 100% in a bank's net stable funding ratio (NSFR) calculations if they are longer than a year, dropping to 50% when they enter their final six months. The fourth tranche of TLTRO funding is therefore set to lose this 100% weighting in June, with the remaining 50% weighting dropping away entirely in December.

The central bank is believed to not favour extending the favourable rate. François Villeroy de Galhau, governor of the Bank of France, said in October that “the recovery is now under way” and that the lower rate “is no longer justified.”

As a result, banks may as well consider both of the June deadlines to be set in stone.

Many lenders hope to phase out some of their holdings for wholesale funding. Dutch banks, for instance, are collectively one of the biggest issuers of retained covered bonds in the eurozone, with this paper posted as collateral for their TLTRO holdings.

Combined, ING, ABN Amro and Rabobank issued €62bn of retained paper throughout 2020 and 2021, according to data from Crédit Agricole. These three lenders has more than €155bn of TLTRO debt outstanding, with the bulk set to mature in June 2023 as part of the fourth tranche.

The Dutch trio have made quick work of their covered bond programmes using the issuance windows that have availed themselves so far this year. Between them, they have placed €6.5bn, the bulk of which was supplied by ING, according to GlobalCapital.

Others have similarly progressed through their funding programmes at speed.

But the events of the last week have shown just how unpredictable the world can be. Lenders must not take it for granted that windows will be open when they want to print. As one FIG syndicate banker put it last week: “gone is the market where stability allows issuers to pick their timing and optimise their pricing.”

Lenders would be well advised to come to the market whenever pockets of stability appear over the coming months, as the TLTRO clock ticks closer to midnight.

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