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When Tight Is Not Tight Enough

30 August 2017 by lberuti

BBVA brought to the market today €1.5Bln of senior non-preferred debt. Non-preferred senior debt is eligible in order to comply with the requirement of the MREL regulation. MREL (which stands for Minimum Requirement for own funds and Eligible Liabilities) was added to the alphabet soup of post crisis regulatory reforms aimed at ending “too big to fail”, together with the TLAC (Total Loss Absorbing Capacity). Banks are required to meet a MREL so as to be able to absorb losses and restore their capital position during and after a crisis. Senior non-preferred debt is therefore a new category of debt instrument with a greater legal capacity to absorb losses than traditional senior debt. The BBVA issue, which has a 5-year maturity, attracted more than €5Bln in client demand, so that the initial guidance of a mid-swap (MS) + 85bps coupon was later reduced to MS + 70bps. All of a sudden, it made the 5-year CDS of BBVA which referenced senior debt quite expensive in the high 60s. Investors duly corrected it, and sent it 5.5bps tighter at 61.5bps, making it the outperformer of the financial sector in Europe.