Crédit Mutuel Asset Management: Subordinated debt
By Paul Gurzal, Co-Head of Fixed Income and Jérémie Boudinet, Head of Financial and Subordinated Debt, Crédit Mutuel Asset Management
February was once again favorable for credit, particularly for subordinated debt, which delivered positive and consistent performances throughout the month, ending between +0.6% and +1.0% in total return depending on the segments (AT1€ at +0.86%; Insurance Subordinated at +0.83%; Corporate Hybrids at +0.6%).
The market continued the trend of previous months, with positive inflows into credit bond segments, well-absorbed primary market dynamics, and a continued appetite for risk, despite more mixed signals at the end of the month.
The primary market was particularly dynamic for AT1 CoCos, with €11.6 billion issued during the month (which we estimate will represent between 25% and 30% of all issuances for 2025), as European banks took advantage of favorable market conditions to pre-finance their upcoming calls in 2025. In the dollar market, UBS Group issued two tranches, along with Julius Baer, Barclays, HSBC, Danske Bank, and a newcomer with a $100 million issue: the Icelandic bank Landsbankinn; in GBP, Natwest and Lloyds; and in EUR: Banque Internationale à Luxembourg, ABN Amro, UniCredit, and Crédit Agricole. Appetite was very strong for each issuance, with very high subscription books, demonstrating sustained demand despite tightening coupons when the bonds were launched.
The earnings season continued with excellent reports from European banks, confirming the trends we have been highlighting for several months in terms of increasing convergence between so-called peripheral banks, whose balance sheet quality is reaching, or even exceeding, that of banks from "core" countries. Low provisioning needs were able to offset certain cost increases, while solvency ratios remain at very satisfactory and comfortable levels. The M&A theme remains very prevalent in the sector, which we elaborated on in a note published in early February entitled "Should We Fear European Banking M&A?".