Banks’ senior and sub funding cocktail: rocky start with a smooth finish
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Banks’ senior and sub funding cocktail: rocky start with a smooth finish

Observers could have been forgiven for thinking the additional tier one market might be as defunct as Credit Suisse, the bank whose demise mired it in controversy. By the autumn AT1s had come roaring back but, as Sarah Aisnworth reports, this was not 2023’s only wild ride in the FIG primary market

A standout moment in the first quarter was the shut-down of the additional tier one (AT1) market after the Swiss rescue of Credit Suisse on March 19, which included a complete write-down of its AT1s. But talk of the demise of the asset class proved premature and sentiment rebounded.

Bank of Cyprus resurrected AT1 issuance in June with a €220m note that attracted orders of €2.75bn, resulting in a subscription ratio of 12.5. The same month, BBVA followed with a €1bn note that achieved a subscription ratio of 3.1.

However, issuers had to pay up to bring deals after the collapse of Credit Suisse. Before then, there had been nine AT1s issued in euros since the beginning of the year.

Data available to GlobalCapital’s Primary Market Monitor from four of them revealed that borrowers paid an average new issue premium of 6.25bp. After Credit Suisse’s rescue, and by late November, data available from four of the euro six AT1s priced showed the average new issue premium was 25bp.

AT1 issuance before and after Credit Suisse’s demise

AT1 before Credit Suisse AT1 after Credit Suisse

Source: Global Capital’s Primary Market Monitor

Average subscription ratios fell back to an average of 4.4 times deal size for those post-March AT1s compared to 5.9 for the deals that went before, while issuers also failed to tighten spreads as much from initial price talk, averaging 37.5bp after the March crisis, compared to 47.2bp previously.

Average AT1 deal size was similar in both periods — €688m until March and then €661m after. But it was not until later in the year that a more substantial revival in AT1 issuance arrived when four issuers priced $6.5bn in November to declare the market fully reopened.

Senior issuance also felt the fallout from the collapse of Credit Suisse as the market shut down from March 10 for several weeks.

BNP Paribas was first to test the water on April 4 with a €1bn eight year non-call seven green bail-in senior, covered 1.9 times and paying a premium of about 10bp. This was below the average new issue premium of 16.3bp in January and 17.7bp in February. However, the premium was judged on the high side for BNPP when compared to its €1bn six year non-call five green non-preferred issued in early January, which had paid a 2.5bp concession.

It was the return of lower tiered issuers achieving large order books that led observers to declare the senior market recuperated. Ireland’s Permanent TSB issued a €650m five year non-call four bail-in senior on Arpil 18 that attracted a subscription ratio of 3.1. PTSB’s previous senior outing in June 2022 was just subscribed.

By the third quarter the senior market appeared fully healed as demand recovered with the average senior deal 2.4 times subscribed, up from two times the previous quarter.

Average new issue premium and spread tightening on senior FIG new issues in €

NIP Spread move from IPT

Source: Global Capital’s Primary Market Monitor

War and duration

War broke out between Israel and Hamas at the start of the fourth quarter, leading to concerns about instability across the Middle East. But it was not the only factor affecting the FIG primary market as issuers faced rising yields and earnings blackouts.

Senior issuance volumes increased in November as yields declined and investors and dealers began pricing in expectations of rate cuts for 2024. This drove demand for duration, which had been low all year thanks to an inverted yield curve.

A total of €3bn 10 year notes were priced in the third week of November from Crédit Agricole, CaixaBank and Crédit Mutuel Arkéa. These were the first 10 year senior notes priced since July.

The standout deal was Crédit Agricole’s €1.25bn 10 year senior non-preferred that garnered final demand in excess of €5.7bn, giving a cover ratio of 4.56 — the highest of any senior bond in 2023.

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