France’s BPCE sells new kind of debt to Japanese

BPCE, France’s second-largest retail bank, has become the first lender to
sell a new kind of debt in Japanese yen, as part of a rush of issuance to comply with global rules for financial institutions.

The bank on Friday priced ¥143bn ($1.24bn) in bonds, including a five-year tranche of “senior non-preferred” debt at a coupon of 0.64 per cent. The sale is the largest bond issued by a French bank in yen.

TLAC, or “total loss-absorbing capacity”, senior bonds take losses if an institution fails, protecting depositors and avoiding taxpayer bailouts.

During the financial crisis many bank bonds were untouchable because they ranked alongside consumer deposits.

BPCE’s sale highlights a regulatory response that has transformed one of the largest bond markets and forced investors to weigh new kinds of risk, and shows how European countries have taken different approaches to lowering senior bonds in the capital structure.

Paris has approved a “non-preferred” bond, ranked above capital but below other senior debt.

The BPCE deal is also the latest example of European bank debt being sold to investors in Japan, where low rates have put pressure on asset managers. Last summer, a Barclays contingent convertible, or coco, bond — the riskiest class of bank debt — attracted strong demand from Asia.

“It’s so appealing that some of them rushed to buy that paper,” said one banker of the BPCE deal. “It’s mainly asset managers who need to provide more return.”

In Europe, the need to comply with regulation has contributed to the fastest start to the year for bank bond sales since 2011. In the first two weeks of January, $43bn of bank bonds were issued in Europe, more than in December and November combined, according to Dealogic data.

Analysts at JPMorgan predict €20bn to €30bn of senior non-preferred deals from French banks in 2017.

In the UK, the US and Switzerland, banks sell bonds from their holding companies. Germany has lowered the ranking of outstanding bonds. The European Commission has expressed concern over the range of responses and looked at a “common approach”, possibly in line with the French method.

Sales of French senior non-preferred debt in recent weeks have totalled $5.3bn in dollars and €4.5bn in euros. Crédit Agricole, Société Générale and BNP Paribas have issued this month.

Investors have grappled with the challenge of assessing risks for new bonds. Moody’s, the rating agency, said that the debt, which it calls “junior senior”, was still a small part of the capital structure.

“If you run your loss simulation, if losses get so big as to touch junior senior, it’s very likely to be wiped out straight away,” said Nick Hill, a managing director at Moody’s.