Crédit Mutuel AM: Monthly commentary on subordinated debt
March was a negative month for EUR denominated subordinated debt, who were victims at first from higher interest rates and on a second instance from a widening of spreads in the second half of the month.
Subordinated insurance bonds, which have a higher average duration than other segments due to structures with call dates generally after 10 years on Tier 2 notes, were the first to suffer and lost -1.7% during the first 4 days of the month, before stabilising and ending the month at -1.4%. AT1 CoCos, for their part, saw their performance deteriorate more gradually, with spreads first resilient when rates rose, before widening progressively (approximately +50 bp of OAS over the month). Corporate Hybrids held up better, ending up the month at -0.7%.
Subordinated debt remains relatively resilient in this turbulent and volatile environment, with good liquidity both on bids and offers. The primary market remained very active during the month on all subordinated debt issues such as Eurofins' Corporate Hybrids (issue with a coupon of €5.75%), ASR Nederland in Restricted Tier 1 (€6.5% coupon for a 10 year call), Bank of Ireland (€6.125%), Deutsche Bank (€7.125%) and even the troubled UK bank Metro Bank (£13.875% coupon!) in AT1 CoCo, or 6 Tier 2 bank issues.
AT1 CoCo's non-calls are not an event: another episode. Deutsche Bank announced the call of its AT1 $7.5% 04/25 and at the same time the non-call of the $4.789% 04/25, the latter having already been uncalled in April 2020, during the Covid-19 crisis. This is a particular case because a repayment of the security would have resulted in a P&L net loss of around EUR 0.3 billion, due to the gradual FX non-revaluation of the security, which had been issued in 2014. Few securities face the same situation, due to differences in local accounting practices, and certain securities in similar situations are being called despite all.
What was the impact of the announcement? The security appreciated by 0.5pt because of its new coupon and call date, while the other DB securities followed suit and DB even issued a new AT1 a few days later. Our conclusion is that non-calls are well anticipated by the market, but are still rare, and if investors have any doubt about an issuer's ability or willingness to repay its security, this will be reflected well ahead in the valuation of the security.
