Biggest EU Banks Embark on the Mother of All Debt Binges

A hot new bail-in-able debt cooked up by financial engineers in France

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware…

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

Put simply, if a bank is resolved, holders of these instruments could lose much or all of their money, similar to stock holders. According to Olivier Irisson, executive chief financial officer at Groupe BPCE, France’s second largest bank, it’s a “very good compromise for investors and banks.”

Judging by how they’re selling, yield-starved investors seem to agree. After the new bonds were rubber stamped by the Banque de France in mid-December, investors gobbled up €1.5 billion of Credit Agricole’s senior non-preferred 10-year bonds despite only receiving about 45 basis points more than they would get on traditional senior debt and about 65 basis points less than on subordinated.

Voracious Appetite

Société Générale quickly followed CA’s lead, issuing €3.5 billion of 5-year dollar-denominated notes. Investors lapped it up. During the same week BNP Paribas sold €1 billion of bail-in-able debt, a mere drop in the ocean compared to the €30 billion of senior non-preferred debt it hopes to raise by 2019. BPCE issued its first non-preferred deal in the second week of the year, a €1 billion six-year trade that attracted $2.4 billion of orders. It then launched an even riskier samurai (yen denominated) non-preferred trade, and most investors were not put off by the A- rating.

“2017 will be the year of senior non-preferred,” said Vincent Hoarau, head of financial institutions syndicate at Crédit Agricole. Europe’s biggest banks certainly have a voracious appetite for new funds. The European Banking Authority recently estimated a €310 billion gap in all the region’s banks meeting their total loss absorbing capital requirements before the 2019 deadline. And much of that gap is expected to be filled by senior non-preferred bonds.

The European Commission has already endorsed the financial instrument, rating agencies have also lent their approval and the ECB can’t wait to come up with “a common framework at Union level“. However, the legislation permitting its issuance is currently only in place in France and is not expected to be passed elsewhere in Europe before the second half of 2017, at the earliest.

But certain banks have already jumped the gun, including Holland’s ING and Spain’s Santander, both of which have begun issuing senior non-preferred bonds despite the fact their issuance has not been officially sanctioned by each bank’s respective national regulator. Even more ominous, Italy’s fragile superbank, Unicredit, has also expressed an interest, though it will probably have to wait for Italy’s banking crisis, of which it has a major part, to blow over (assuming it can) before joining the party.

A Staggering Volume of Debt

Even by today’s inflated standards, the volume of debt the G-SIBs hope to issue in the next two years is staggering. Santander alone intends to issue between €43 billion and €57 billion, in order to meet the capital requirements that are scheduled to come into effect for the world’s 30 biggest banks on Jan 1, 2019. That’s between 60% and 75% of Santander’s entire market cap. And if everything goes according to plan, most of that debt — between €28 billion and €35.5 billion worth — will be issued in the form of senior non-preferred bonds.

For the moment there’s little concern over investor appetite, says Demetrio Salorio, global head of debt capital markets at Société Générale Corporate & Investment Banking. “The investor base is keen,” he says. “They are far more at ease with the instrument than they were 18 months ago.” Spreads could even tighten, he reckons.

All of which is testament to just how desperately starved of yield institutional investors have become in the NIRP environment as they’re trying to get their hands on financial instruments that offer virtually no security in exchange for the slimmest of additional returns.

But the investor pain, when it’s time for it, should relieve taxpayers and the public. When the bank collapses and is being resolved or recapitalized, these bondholders are supposed to get bailed in and lose some or all of their investment. This would protect taxpayers at least to some extent from getting shanghaied into doing that job. And if institutional investors who take that risk don’t get paid enough for taking that risk, so be it. It’s just pension funds and retirement nest eggs under their management that will take the hit.

Unless, of course, the government, under political pressure, decides to bail out those bondholders anyway with taxpayer money, as they’re doing in Italy’s banking crisis at the moment, on the pretext that these bondholders were naive retail investors who were missold a similar version of bail-in-able junior bonds. And so it would be back to square one. By Don Quijones.

In Italy, the insider blame game has begun. Read…  Italy’s Banking Crisis Is Even Worse Than We Thought

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  13 comments for “Biggest EU Banks Embark on the Mother of All Debt Binges

  1. Nik says:

    As is Always the case, that ‘Sage’ financial advisor P.T.Barnum…was Correct…! lololol

  2. TJ Martin says:

    So the real question is in light of all the things going on in the financial world as well as the overall world’s economic situation is ;

    When does the House of Cards finally come falling to the ground . And what might finally cause it ? A quote from the now deceased Wall Street Baron , creator of over the counter trading , staunch Conservative , hard core capitalist as well as one of the wealthiest men in the US in his day : Morris Cohon to his son* back in in the early 70’s that might provide a clue ; [ edited for excess profanity only ]

    “ Capitalism is dying boy . Its dying of its own internal contradictions . You think the revolution is gonna take five years . Its gonna take fifty . So keep your head down . And hang in there for the long haul because I’ll tell you something , The sons of [ censored ] running things don’t give a damn about their children or their grandchildren and they certainly don’t give a [ censored ] about you . They’ve paid their dues and they want to get out with theirs . They’re gonna sell off everything thats not nailed down to the highest bidder . Don’t get crushed when it topples down . Take care of yourself and your family . If you can make a difference do it but there are huge forces at work here and the have to play themselves out according to their own designs not yours . Watch yourself . “

    *And who was Morris’s son you might ask ? Suffice it to say you most likely know him as Peter Coyote . The polar opposite of his father .

    • NotSoSure says:

      When? As long as the muppets can wait 4 years for a change, nothing will tumble down because it just implies that the situation is not serious. 4 years is a really long time.

  3. cdr says:

    You make me want to cry.

    Large banks issuing high risk debt as if it’s a normal event. Repayment is questionable. Buyers are desperate for yield and probably using other people’s money so no personal risk for most of the trustees.

    This type of thing defines the Eurozone to me. Which ring of hell is it?

    Thankfully Trump won and the Eurozone mess isn’t coming here. Yellen appeared to grow a brain part today, although it might be re-digested without appropriate pressure being applied to her. Without Fed support, the Eurozone negative rate debt plan is on it’s last legs and a bad consequence is coming.

    To the good, healthy markets require gains and losses. In a couple of years, the Eurozone will be in the megaloss department. Then downhill from there.

    • Kent says:

      You’re assuming US banks aren’t holding a ton of that debt, and Euro banks won’t be calling a ton of US debt?

  4. SnowieGeorgie says:

    Issuing new forms of what is really debt debt debt — to solve a what ? A debt-induced crisis , of all things.

    Let’s all buy cases of liquor and beer and wine to help our alcoholic friends through their alcohol-induced despair.

    The higher and more educated these financial and economic bureaucrats are — the stupider they be.

    I am going to sit back — and watch — and TRULY ENJOY what is surely coming.


  5. subunit says:

    “Unless, of course, the government, under political pressure, decides to bail out those bondholders anyway with taxpayer money, as they’re doing in Italy’s banking crisis at the moment, on the pretext that these bondholders were naive retail investors who were missold a similar version of bail-in-able junior bonds.”

    Hi Don- from reading your pieces, it seems like the small-retail-investor story was actually a fair description of what happened in Italy (banks bamboozling mom and pop made up a significant chunk of these sales), but is that also true of France or Spain? Or do you think that they might deploy the same pretext with the justification that the institutional investors who should have known better were working on behalf of mom and pop? Thanks for your work.

    • Don Quijones says:


      Don’t know much about France in this regard but Spanish banks have already taken billions of euros off mom-and-pop investors through the preferentes scam. Even young children and Alzheimer sufferers were not spared the aggressive sales pitch (Here’s a piece I wrote about it in 2013:

      In the end many were refunded (many years later) thanks to the unlimited generosity of the unconsulted Spanish taxpayer. Sound familiar?

      • subunit says:

        “In fact, not only did bank clerks and branch managers fail to inform their customers of the risks involved in the investment (which, in and of itself, is illegal, according to Spanish law), they actually marketed the preferred shares as fixed term deposits. They also forgot to mention that the preferentes, some of which had terms of 1,000 years, could never be cashed in.”

        WOW. Thanks for that link Don. That’s an impressively crooked scheme.

  6. Bruce Adlam says:

    This is just fraud. How can we hold the scums that run the pension funds accountable now before it blows up so they can do life behind bars.they know exactly what they are doing. To me a FIRINGSQAUD is more appropriate why should we feed these mongrals.Trump is nothing so far compared to the EU thieves and yet no media is taking the EU to task is beyond belief

  7. Kasadour says:

    These big banks are for-profit institutions. Why do they need to issue debt to remain solvent? Where is all the money going?

    And it’s pensions that are primarily “starved for yield”. if that is the case, and I believe it IS the case, these “starved-for-yield” pensions funds are also insolvent. Again, where is all the money going?

    Issueing this much debt in a short period and structuring it bail-in-able is more can-kicking. Both pensions and banks are locked into a mutual, no way out scenario. But in the end, the banks win.

  8. TCG says:

    How would a person know if their pension or contributions to a 401k or similar are going into such risky investments and how much?

    My personal contributions are going mostly into a retirement “pathway” fund which changes the asset type mix over time toward supposedly less risky investment types the closer I get to retirement. I’m not anywhere particularly close, but I can imagine these kinds of things really hurting some of my older colleagues if it’s part of their supposedly lower risk investment mix and then hitting retirement with no money. Sounds like 2008 again.

    I suppose fiduciary responsibility isn’t worth a hill of beans to the pit of vipers running things. They got theirs.

  9. Ambrose Bierce says:

    why would my pension fund be buying low yielding bonds written by Spanish banks? is there some paucity of suitable investments? at issue here is why would this ever happen? can’t Trump make them invest in the US?

Comments are closed.