La Française: Subordinated debt

La Française: Subordinated debt

7 januari 2025

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The subordinated debt market has recorded two phases in December. During the first half of the month, the trend seen in November continued, with continued strong appetite for ‘high beta’ credit universe and positive inflows into credit funds.

This situation enabled spreads to tighten and AT1s to outperform, particularly the EUR denominated segment. The last 15 days have been flat in terms of inflows, which is logical during the Christmas break, but valuations have been somewhat battered by the renewed volatility on the fixed-income and equity markets. EUR AT1s ended the month with a positive performance of +1.3%, which contrasts sharply with the +0.3% of USD AT1s, the latter having been more affected by their greater sensitivity to US interest rates. Hybrid corporate debt performed at +0.5% over the month, while subordinated insurance debt performed at -0.2%, marked by the widening of European sovereign yields in the wake of US yields.

The primary market was logically very quiet during December. The only notable issue has been a new Restricted Tier 1 debt by Scor SE, issued with a coupon of €6% with a first call after 10 years. Despite the political and budgetary uncertainties in France, the order book was heavily oversubscribed, at EUR 2.8bn, for an issue of EUR 0.5bn, thanks to an attractive coupon compared with the financial ratings of the issuer and the bond (rated BBB+ by S&P). The new issue benefited from this broad issue level to perform positively on the secondary market over the following sessions.

The newsflow was once again dominated by the continuing mergers and acquisitions momentum in the financial sector:

  • Preliminary agreement on the acquisition of Direct Line by its British competitor Aviva, following an initial offer rejected by Direct Line's management. The acquisition is not expected to have any impact on Aviva's ratings, while Direct Line's ratings (Baa2 at Moody's) are expected to converge with those of Aviva (A2 at Moody’s).
  • The pressure game between UniCredit, Commerzbank, Banco BPM and Crédit Agricole is intensifying. UniCredit has reportedly increased its stake in Commerzbank from 21% to 28%, again in the form of derivative contracts, in order to have a degree of optionality. However, we do not expect any further developments before the formation of a new government in Germany. At the same time, Crédit Agricole carried out a similar operation to raise its stake in Banco BPM to 15.1% (from 9.9%), in order to protect its stake, while UniCredit did not increase its bid for Banco BPM.
  • Danish bank Nykredit announced its intention to acquire Spar Nord Bank to form the third largest Danish bank in terms of assets. Nykredit holds just under 20% of Spar Nord Bank's capital and the takeover bid appears to be friendly for the moment.

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