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Sub Is Flying

13 January 2017 by lberuti

Besides the burst of volatility in the auto sector yesterday, one of the salient points of the week was the decompression between senior and subordinated protection in the financial sector. It largely followed a presentation made on Wednesday by SANTAN ( Banco Santander SA ). They announced that they would sell as much as €26Bln of so-called senior non-preferred (SNP) notes: €14Bln in 2017 and another €12Bln in 2018. SNP take losses after equity and junior bonds, but before traditional senior debt. Hence, they are not deliverable into CDS referencing senior debt, but only into CDS referencing subordinated debt. SANTAN’s plan is larger than what investors were previously expecting, and followed issuance of this new type of instruments over the last few weeks by ACAFP ( Credit Agricole SA ) – they were the first to issue such notes in December last year -, SOCGEN ( Societe Generale SA ), BNP ( BNP Paribas SA ) and BPCE. That triggered a wave of relative value trades where people bought subordinated protection and sold senior protection on banks. Indices duly followed, and on the week, while iTraxx Financials was 1bp tighter, iTraxx Financial Subordinated was 8bps wider.