La Française: Subordinated debt

La Française: Subordinated debt

12 november 2024

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The subordinated debt market has shown strong resilience despite renewed tensions in the bond markets. While the US 10-year yield increased by 50bps during October (from 3.78% to 4.28%) and the German yield by 27bps (from 2.12% to 2.39%), appetite for 'High Beta' credit remained robust. EUR-denominated AT1s appreciated by 0.9% over the month, while their USD counterparts saw their performance decline by 0.7% due to their higher sensitivity to US rates.

Spreads cushioned the rise in the rates component, with a tightening of 45bps on EUR AT1s (ending the month at 357bps) and 31bps on USD issues (at 286bps).It's worth noting that USD AT1s are approaching their historically tightest spread levels (the record being 257bps in January 2018 and January 2020), while EUR issues remain distant from these levels (the record is also 257bps in January 2018, while the level was 300bps in January 2020).

Similar to the High Yield segment, we continue to observe strong appetite for carry-offering securities in the credit market, which is supported by stable net bond supply. Corporate Hybrids achieved a performance of +0.5% in October, while insurance subordinated debt declined by 0.1%.

The primary market was dynamic for AT1 CoCos, with Commerzbank at the beginning of the month (7.5% coupon in USD), followed by Swedish bank SEB at the end of the month (6.75% in USD), Belgian bank Belfius Bank (6.125% in EUR), and Landesbank Baden-Württemberg (6.75% in EUR).The latter two cases are characteristic of the favorable refinancing conditions for European banks in their AT1 segment. Belfius and LBBW each had only one outstanding issue callable in 2025, with among the lowest coupons in the segment (3.625% and 4% respectively).

The new issues were once again facilitated by tender offers on existing securities. The vast majority of AT1 securities with call dates in H1 2025 has now been refinanced. This suggests possible early refinancing for H2 2025 calls before year-end, especially given that the current European bank earnings season is generally showing good results for the sector.

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