Crédit Mutuel AM: Monthly commentary on subordinated debt
By Paul Gurzal, Co-Head of Fixed Income and Jérémie Boudinet, Head of Financial and Subordinated Debt, Crédit Mutuel Asset Management
August was a tale of two halves for subordinated debt, driven by the US equity markets, which were favourable in the first half of the month and unfavourable in the second half. The performance of the various segments ranged from -0.1% to +0.2%, with logically low volumes of trade and a lower flow dynamic for credit funds than in July.
Activity in the primary market nevertheless picked up during the second half of the month, with some notable transactions. The first came from the German insurance company Allianz, which has placed a Restricted Tier 1 rated ‘A’ (very rare for perpetual financial subordinated debt) at a coupon of 6.55% in USD for a first call in 8 years and a reset spread of 232bp, a record level on the European Tier 1 debt market in the last ten years.
Equally strong was demand for a hybrid issue from Japan Tobacco, which, despite its industry closing the door to many funds, was able to keep up with an order book of 7.9 billion euros for this issuer, which is rarely the case in the EUR sub-category. The final pricing of the 30NC5 hybrid was established at 3.875%, 80 bps tighter than the initial pricing, which we believe is a record year to date for this sub-category. Demand is therefore still present and favourable, despite tight valuations in terms of spreads.
Deregulation has been in vogue in the banking sector this summer, with a shared goal of supporting smaller institutions.
In the US, a bi partisan bill has been submitted in parliament aimed at introducing a $20M guarantee cap on certain deposits (compared to a $250k FDIC guarantee on all deposits currently), but only for banks with balance sheets under $250 bn. There is a long way to go before the legislation can be passed, but this would be a strong signal for over 4000 US banks.
In the UK, regulators will allow banks with less than £ 40 bn of deposits to no longer be subject to MREL (i.e. issue debt to protect deposits) which will allow them to increase their margins. In Germany regulators published a discussion paper proposing to no longer subject banks under € 10 bn to capital requirements, but only to enhanced leverage requirements.
While the US and UK are very clearly embarking on deregulation steps that go beyond these proposals, the European Union remains without a real proposal for the moment, at the risk of losing competitiveness in its banking sector.
