Update on subordinated debt markets – October 2022

In October, the € AT1 CoCos debt index recorded a positive performance of + 5.82%. In the same vein its counterpart in dollars with a performance of + 1.58% in October.

Market environment

October was once again a turbulent month for the subordinated debt markets. The first part of the month was marked by volatility in global sovereign yields as inflation surprised to the upside in many countries and the fears surrounding the UK quagmire. The second half of the month was influenced by the UK government’s turnaround on fiscal and fiscal policy that led to the resignation of Prime Minister Liz Truss and a more accommodating tone from central banks. Indeed, the ECB raised rates by 75bps (as expected) and the tone was more accommodating, raising expectations of a rate hike easing in the future. The last two weeks of the month were positively taken by the market and we saw a rally in the subordinated debt market. In October, the € AT1 CoCos debt index recorded a positive performance of + 5.82%. In the same vein its counterpart in dollars with a performance of + 1.58% in October. The other subordinated debt classes also closed the month positively: the iBoxx Tier 2 debt index increased by + 1.90%, the iBoxx subordinated insurance debt index recorded a performance of +1.12 % and that of Corporate Hybrids an increase of + 2.20%.

The primary market has been underactive this month due to the start of the publication of the results. We also note the arrival of Permanent TSB (whose rating was recently raised by Moody’s from Ba1 to Baa2) with an AT1 of 250 million euros with a 13.25% coupon in anticipation of the acquisition of the Ulster bank announced in December 2021. In addition to subordinated debt, we have seen primary from peripheral issuers on senior debt, offering high coupons. For example, the 350 million euro issue of Banco Comercial Portugues with a coupon of 8.5% (maturity 2025) and the arrival of the Greek bank Alpha Bank, with a senior bond loan of 400 million euro and a coupon of 7% (maturity 2025, callable 2024). Despite the difficult market conditions, the primary market is gradually recovering and offers investors higher coupons due to higher financing conditions due to rate hikes.

The month of October was once again animated by the theme of calls and not. There have been a lot of tenders for the banks. First, Virgin Money announced the redemption of a £ 450 million AT1 on the first redemption date in December (XS1346644799) following the issue of a new £ 350 million AT1 at 8.25% with a first redemption date. call in 2027. In addition, Shawbrook has launched an exchange offer for its existing £ 125 million AT1 with a first redemption date in December (XS1731676794) for a new £ 124 million AT1 with a coupon of 12.103%. For its part, Crédit Mutuel has announced a tender on its Legacy Tier bonds. These securities were issued as Tier 1 but have been fully disqualified since January 2022. The rationale is to “proactively manage their balance sheets and provide liquidity to bondholders”, while the bank does not comment on future redemption decisions. titles.

Credit Suisse continued to be the center of attention this month. The Swiss banking group presented the results for the third quarter and the new strategic plan. As expected, the restructuring plan includes a radical overhaul of the group which will focus on its strongest businesses – wealth management, Swiss banking and asset management – with a drastic reduction in investment banking. The main pillars of the plan are: (i) a radical restructuring of the investment bank which will reduce its risk-weighted assets (RWA) and its exposure to leverage by 40%, (ii) a reduction in the additional costs of CHF 2.5 billion, or 15% of its cost base as well as (iii) a capital increase of CHF 4 billion which will increase its CET1 ratio by 140 bps. On the latter point, Credit Suisse has hired around twenty banks to participate in the capital increase and make the Saudi National Bank a new major shareholder. Refocusing on stronger and more stable firms and raising capital should be good for bondholders.

The earnings season has started well in Europe. Overall, earnings are positive with higher-than-expected revenues due to higher interest income and lower loan loss provisions. Asset quality remains solid and solvency ratios have so far been flat or rising and future expectations are generally optimistic, with the exception of UK banks looking to accrue provisioning in advance. Asset quality was a key concern for UK domestic banks this quarter, with all three issuers seeing a large increase in provisions to reflect the significant change in macroeconomic outlook from second quarter results. Lloyds led the way with a £ 668 million charge, followed by Barclays which reserved £ 381 million and Natwest Group £ 242 million, giving the three banks a total of £ 1.3 billion.

On the insurance side, ASR acquired Aegon Netherlands. The groups announced that they have reached an agreement to merge their Dutch operations encompassing all insurance activities in the Netherlands (including Aegon’s mortgage creation, service operations and banking activities). The total consideration amounts to € 4.9 billion and includes (i) the granting to Aegon of a 29.99% stake in ASR and (ii) a cash consideration of € 2.5 billion which should be financed by existing excess capital and potential issue. This will strengthen ASR’s position as the second largest insurer in the Netherlands with a pro forma market share of 27% in life and 21% in non-life.

Main risks associated with subordinated debt funds: capital loss risk, sustainability risk, ESG investment risk, interest rate risk, credit risk, risk related to the impact of techniques such as derivatives, counterparty risk, relative risk to the holding of convertible bonds, risk associated with contingent bonds, equity market risk, risk of potential conflicts of interest, legal risk

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