September 5, 2013 / 2:16 PM / 4 years ago

Credit Agricole adds new twist to CoCos to counter S&P changes

LONDON, Sept 5 (IFR) - Credit Agricole is preparing to break new ground in the burgeoning bank capital sector with the sale of a high-trigger permanent write-down bond that will convert to a more cost-efficient structure if S&P changes its rating methodology.

The French bank is planning to issue a 20-year non-call five-year US dollar denominated Tier 2 subordinated instrument as it seeks to address S&P’s Risk-Adjusted Capital (RAC) ratio - the agency’s way of assessing banks’ capital adequacy positions.

Credit Agricole CIB is acting as the global coordinator, while Citi, Credit Agricole CIB, Deutsche Bank, Goldman Sachs, HSBC and UBS are joint lead managers. The borrower has been meeting investors around the globe this week, and sources say a deal could emerge as early as next week.

The structure is likely to raise a few eyebrows. The bond will be permanently written down to zero if the bank’s Common Equity Tier 1 ratio falls below 7%. That ratio stood at 11.3% as of June of this year.

But more importantly, the issuer has included a coupon step-down provision, with the bonds converting into vanilla Tier 2 instruments if S&P changes its rating methodology.

Credit Agricole will also reduce the coupons if S&P deems the bonds no longer count as 100% equity credit.

It’s easy to understand why Credit Agricole is going down this route. Societe Generale and Danske Bank were both burned by S&P in July when it changed its ratings methodology on the banks’ subordinated debt, meaning the securities were no longer included in the RAC ratio.

Bankers are aware that the ratings clause will come at a price, as investors may lose out on precious spread if S&P changes its guidelines.

“We’ve been having some interesting discussions around the value of coupon deferrals, permanent write-down versus temporary write-down, and now we have the S&P clause to factor in,” said a banker.

“Credit Agricole weighed up a few possibilities for issuing capital and decided that increasing their S&P equity credit was a much more near term driver for issuance,” he added.

Barclays’s two high trigger permanent write-down Tier 2 CoCos are being considered the best comparables for structure and pricing.

The USD3bn 10-year bullet Tier 2 that priced at 7.625% in November last year is bid at a yield to maturity of 7.9%, and a USD1bn 7.75% 10-year non-call five that priced in April is bid at a yield to call of 7.16%.

Last week’s 8.25% USD1.25bn Additional Tier 1 instrument from Societe Generale is another reference point.

The 144A/Reg S bonds will be rated BBB-/BBB- by S&P and Fitch. Coupons will be paid semi-annually and will be fixed until the first call date in 2018. After that, coupons will reset to the then-prevailing five-year mid-swap rate plus a margin. (Reporting by Aimee Donnellan, editing by Julian Baker)

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