LONDON: BNP Paribas could become the first French bank to issue a new type of senior unsecured debt as early as October, potentially providing a blueprint for lenders across Europe as they square up to changing regulation.
France proposed the new layer of debt, known as non-preferred senior, at the end of 2015 as a way of tackling new global requirements for additional layers of loss absorbing debt.
However, delays in the lawmaking process mean that the emergence of this new asset class has been pushed back, leaving the country's banks to play catch-up with other jurisdictions such as the United Kingdom and Switzerland.
A spokeswoman for BNP Paribas told IFR that issuance could start as soon as October, if the relevant law has been passed by then.
BNP Paribas, which has the largest shortfall in Total Loss-Absorbing Capacity-eligible debt among French lenders, has "pencilled in" a deal for mid-October, said one investor.
The French bank will have to navigate a short issuance window as it will go into blackout ahead of its third quarter earnings, due to be released on October 28.
"Some banks are taking steps to issue very quickly. The issue documentation can be finalised quickly once the law has been passed - it could be a matter of days," said Herv? Eku?, capital markets partner at Allen & Overy.
Once issued, the new layer of debt would sit between existing subordinated and senior and could be used as a potential template for other European jurisdictions that are subject to the same rules.
WAITING GAME
According to a June investor presentation, BNP Paribas aims to raise around 30bn of TLAC-eligible senior debt by January 2019. That equates to 10bn per year, though it can count some of the senior debt priced earlier this year towards 2016's target.
While UK and Swiss banks still sell both opco and holdco senior debt, BNP Paribas will prioritise issuance of non-preferred senior.
"Going forward, it will be our new senior format," the spokeswoman said. The law permitting the new layer of debt is currently being reviewed by the Commission Mixte Paritaire [Joint Committee].
"Once it is out of the CMP, the text is then generally voted on within two to three weeks. We could have a law by mid-October, though it could be quicker or slower," said Allen & Overy's Eku?.
READY TO GO
The size of BNP Paribas' shortfall means it will likely be the largest issuer of non-preferred senior among the French banks, though others will be keeping a close watch on how the market develops.
"French banks such as Societe Generale could follow, though it has less of an imminent need. Credit Agricole, and mutuals like BPCE and BFCM, are also in less of a hurry.
It really depends on how the first trade goes, and if it attracts demand," said Soline Poulain, a credit analyst at Henderson Global Investors.
While the asset class is still untested, other forms of subordinated senior debt (sometimes called Tier 3) have been well absorbed, suggesting investors are ready and willing to start buying.
HSBC for example received 6.4bn of demand for a 2bn eight-year issued out of its holding company at swaps plus 87bp on Tuesday.
TEST DRIVE
The first French trade will give rival institutions a crucial insight into how much it will cost to fill their loss absorbing buffers. Banks must pay a premium over their senior opco curves because non-preferred senior would absorb losses earlier in a crisis.
A BNP Paribas 750m Tier 2 bond due Jan 2027 (Baa2/BBB+/A) is trading at swaps plus 193bp, according to Tradeweb. A 1bn Feb 2026 senior bond (A1/A/A+) is bid at 35bp.
Pricing levels for loss absorbing senior debt have become increasingly attractive.
A 500m three-year senior resolution note (SRN) issued in June by Danish mortgage institution Nykredit, the first of its type, is now bid at swaps plus 44bp, 66bp inside its plus 110bp reoffer level.
It is not certain that the French banks would start issuing in euros, but it can be easier to market a new product in a borrower's home market.
Holdco senior bonds and Nykredit's SRN will provide key reference points, though the premium charged by investors can vary by bank depending on the shape of the capital stack, and overall issuance targets.
"The interesting thing with Tier 3 is whether you call it senior or sub, and how it's treated in the indices," added Henderson's Poulain. "The way it is labelled might have an impact on how people view it and price it, and could make a difference depending on mandate restrictions."
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