The intensifying geopolitical tensions in the Middle East have raised fresh concerns in the global capital markets. They have no doubt increased the stress from the prevalent worries among most market participants about major sovereign bond markets' fast rising yields.
All this volatility has made banks’ funding more costly, even clouding the outcome of a deal execution.
Within such difficult market conditions, a tried and tested way to bolster funding is to turn to Japan.
Japan's onshore high grade bond market was indeed caught up in the recent yen rates volatility, but the overall yen market has been arguably far more accommodative to some foreign issuers than core euro or dollar markets regardless.
But this is not just because the Japanese market has been insulated from global turmoil for a myriad of reasons, although it doesn't hurt.
Instead, the latest added benefit is clarification in documentation from some globally-systemically important banks (G-SIBs) that will alleviate local investors’ regulatory fears from higher risk weighting. Removing this uncertainty will in turn allow these foreign banks to raise senior preferred debt more freely in yen.
Tweaking their documentations can allow certain G-SIBs’ senior preferred debt to be explicitly bail-in ineligible. In other words this means the debt will not be counted towards their total loss-absorbing capacity (TLAC) or minimum requirement for own funds and eligible liabilities (MREL), in turn allowing access to more investors.
This structuring may seem burdensome at first if treasury desks consider it extra documentation work on top of an already complicated job. But this documentation clarity has already shown its merit.
Société Générale introduced this innovative structuring in mid-October to its funding in Japan, allowing it to publicly raise senior preferred debt in yen for the first time since at least 2019. It issued a ¥68.4bn ($460m) multi-tranche Euroyen of which the senior preferred layer attracted the largest demand.
Proven template
G-SIBs fund their TLAC layer through senior non-preferred or holding company bonds as their senior preferred bonds are virtually not bail-inable should a bank be resolved. But some G-SIBs can use a tiny portion of their senior preferred debt as part of their bail-inable debt. SocGen is one such institution that can do that.
Debt capital markets bankers say Banco Santander and possibly other European banks also have similar small allowances they can utilise for their bail-in funding needs.
But this has been a headache for some Japanese bank treasury investors as senior preferred debt carries lower risk-weighting under Japanese regulations. This treatment on TLAC debt was introduced by Japan's Financial Services Agency in 2019.
This had turned into a broader problem for some foreign issuers. Because of investor concern SocGen has found it inefficient to issue benchmark senior preferred yen bonds. In its last visit to the yen market at about the same time in 2022, it raised only half of the new deal’s size, choosing to drop all previously marketed seior preferred tranches. This resulted in a ¥33bn Euroyen that comprised senior non-preferred and tier two notes.
Now, SocGen included explicit language and various clauses in the documentation of its most recent deal to ensure its senior preferred bonds would not contribute towards its TLAC funding.
This can clearly serve as a template for other concerned G-SIBs and they should take note and start preparing their own tweaks should they wish to secure this funding diversification.
After all, funding conditions are fast becoming more difficult and any diversification should be welcomed in times of stress and beyond. The challenging market conditions in Europe werehighlighted by one FIG banker telling GlobalCapital on Tuesday that bank “issuers are starving for liquidity,” adding that “each and every institution is discovering deposit outflows”.
And senior preferred debt is just the right tool to fill in liquidity at times of increased global stress stemming from multiple directions.
The path of least resistance
If issuers need further confidence of investor demand for foreign paper in Japan, both the private and public debt markets provide ample evidence.
Some foreign FIG borrowers have found attractive funding in the market on the back of higher yen rates and the differential between their credit spreads to local issuers when swapped to yen.
The appetite for yield and risk was evident in this year's thriving yen MTN market, where Bank of Nova Scotia returned to raise capital last Friday. Its ¥12bn 10 year non-call five tier two private placement was completed at a cost largely no different than where it can raise tier two capital in Canadian dollars, which has been far lower than funding in euros or dollars.
Moreover, BFCM showed at the beginning of the month that, despite global volatility, the yen market remained relatively insulated and can provide liquidity in size.
Issuing only senior preferred debt, the regular French yen borrower achieved its largest ever Samurai, lifting ¥167bn ($1.13bn).
BFCM is no G-SIB. But it also underlined local investors' strong favouritism towards the senior preferred layer. Now that there is a template for G-SIBs, during arguably worsening market conditions, they can only gain from tweaking their documentation to expand their funding horizons.