Booming demand for loss-absorbing senior debt emerged as a key theme in the yen market in 2018, and Lloyds Banking Group was at the forefront of the trend, bringing the first deal to draw the attention of regional bank investors following a clarification of bank capital rules.
The UK bank’s triple-tranche offering in May, sold from its holding company to count towards the EU’s definition of total loss-absorbing capacity, kicked off a run of similar deals as other global issuers lined up to tap a new group of Japanese buyers.
Lloyds raised an impressive ¥169bn (US$1.54bn), split between ¥131.9bn 0.65% five-year, ¥31.3bn 0.968% 10-year, and ¥5.8bn 1.182% 15-year bonds. The spreads over yen offer-side swaps were 49bp, 65bp and 66bp, respectively.
The deal was notable for the increased participation of regional buyers, including several first-time investors in loss-absorbing debt, after Japan’s Financial Services Agency clarified that domestic banks with no overseas branches would largely escape higher risk weightings on investments in loss-absorbing bonds.
Limiting the changes to bonds from global systemically important banks meant loss-absorbing senior debt from banks such as Lloyds – which follows the EU’s minimum requirement for own funds and eligible liabilities (MREL) but is not a G-SIB – would be treated the same as preferred senior debt.
The impact of the notice was clear. Lloyds had issued holdco bonds in yen in December 2017, but raised a much more modest ¥45.5bn, split between ¥37.8bn six-year and ¥7.7bn 10-year tranches. In the May issue, regional banks and shinkin banks more than doubled their allocations to ¥8.1bn and ¥28bn, from ¥3.6bn and ¥10.6bn, respectively.
Lloyds’ success was no accident. The bank makes a point of visiting Japan twice a year to meet investors and broaden its name recognition, and held roadshows in early May in Tokyo, Osaka and in two other regions.
Pricing also helped, as the bank chose to prioritise size rather than the tightest possible price, according to bankers on the deal. Still, pricing was competitive compared with its funding options in US dollars and euros. The five-year came flat to or inside its funding options in the two currencies, while the 10-year was at least 5bp inside its new issue levels in dollars and euros.
Life insurers also participated, enabling Lloyds to issue a 15-year tranche – its longest in the Samurai market since 2010.
Mitsubishi UFJ Morgan Stanley, Mizuho, Nomura and SMBC Nikko led the deal.
The transaction had been closely watched as a litmus test of appetite for loss-absorbing senior deals following the FSA guidelines, and its success encouraged several other foreign banks to follow suit with TLAC-style deals of their own. Credit Agricole, BPCE, BNP Paribas, HSBC, Barclays, Societe Generale, and UBS all followed during IFR’s review period, the last six all raising more than ¥100bn each.
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