What's happening?
BNP Paribas has announced a new SGD-denominated long 7YR senior non-preferred notes due Sep 2024 (the actual tenor is 7.5 years), with an initial price guidance in the 3.875% area. This new issue is expected to be rated investment grade of A-/A+ by S&P/Fitch, and comes on the back of two similar senior non-preferred note issues (USD- and EUR-denominated) by the bank following the amendment of the French Financial and Monetary Code on 10 Dec 16 relating to the ranking of banks' obligations in a liquidation scenario, creating a new senior debt class for banks which will allow an extra layer of senior debt to absorb losses ahead of other senior creditors.
What investors should know about the new senior non-preferred notes
It is important for investors to note that these new SGD long 7YR senior non-preferred notes will rank junior to the bank's existing senior unsecured creditors (which will now be recognised as "senior preferred") while ranking above its subordinated debt instruments which include Tier 1 (AT1) and Tier 2 capital securities. The intention of this new category of debt is to facilitate the implementation of bank resolution procedures in France as provided for in the European Bank Recovery and Resolution Directive (BRRD) and to enable French banks to meet the Financial Stability Board's (FSB) Total Loss Absorbing Capacity (TLAC) requirements, ensuring banks hold sufficient levels of capital instruments and preventing potential taxpayers' losses.
Thus, these bonds would contain "bail-in" features similar to Basel III-compliant AT1 and Tier 2 debt, allowing the bond principal to be permanently written down partially or in full upon a "non-viability" event, as determined by the relevant regulatory authorities. The new senior non-preferred notes will be bailed-in before senior preferred debt (but after subordinated AT1 and T2 debt has been bailed-in) in the event of resolution under the BRRD. As a reflection of this, we note that the these new bonds will be rated investment grade of A-/A+ by S&P/Fitch which are above the ratings of BNP Paribas' existing subordinated bond issues. As of end-Dec 16, BNP Paribas reported a Common Equity Tier 1 (CET1) ratio and total Tier 1 capital ratio of 11.5% and 12.9% respectively, with a liquidity coverage ratio (LCR) ratio of 123% – above the minimum requirements under Basel III.
Comments on pricing
To get a sense of the "fair" pricing of this new SGD issue, we may make reference to where BNP Paribas' existing USD-denominated senior non-preferred bonds are trading at compared to its outstanding USD Tier 2 issues. The BNP 3.8% 01/10/24s, issued last month and sporting the same terms with similar credit ratings to the upcoming SGD issue, were issued at a 160bps spread over UST and are currently quoted at 177bps (ask price: 99.316) – 47bps tighter compared to its outstanding USD T2 issues (BNP 3.375% 09/28/25s; BNP 4.375% 05/12/26s), which are trading at spreads of around 224bps (both issues are rated one notch lower at Baa2/BBB+/A by Moody's/S&P/Fitch). A similar discount to the spreads of where its Tier 2 SGD bonds (BNP 4.300% 03Dec2025 Corp (SGD)) are trading at implies a spread of 110bps over SOR for an SGD senior non-preferred issue, with a "fair" yield of around 3.56% for a long 7-year tenor, which makes the 3.875% indicative yield attractive. Nonetheless, given the strong interest it attracted for its USD and EUR-denominated senior non-preferred bond issues, we expect the final pricing for this SGD issue to narrow somewhat from the 3.875% yield towards our fair value estimate.
