Credit Agricole: Chronology of a local debt issue by a foreign bank out of left field

Revenge for the World Cup final loss?

By Gareth Vaughan

It may be a little known, far away bank to most New Zealanders, but the mire France's Credit Agricole is in should be of concern to at least 2,876 New Zealanders.

They are the holders of Credit Agricole perpetual deeply subordinated notes with a face value of NZ$250 million issued in late 2007 just as the bank started disclosing write-downs from the US subprime mortgage market meltdown, which have ultimately seen it take a €12 billion hit.

Overnight the latest chapter in Credit Agricole's seemingly endless run of bad news emerged. In its second profit warning of the year, Credit Agricole, which has been using French actor Gérard Depardieu to promote itself in the Ukraine, said it will make a 2011 loss, write off €2.5 billion euros worth of assets and cut 2,350 jobs.

Reuters reports the pressure on French banks' capital and liquidity has led to recurring speculation they may ultimately seek a government bailout, although Credit Agricole chief executive Jean-Paul Chifflet denied the bank would need help in meeting new Basel III bank capital regulations.

The overnight news closely follows Moody's downgrading France's three big banks, including Credit Agricole, citing their difficulty borrowing money earlier this month. It cut Credit Agricole and BNP Paribas to Aa3 from Aa2 and Societe Generale to A1 from Aa3. It also assigned a negative outlook to all three banks' ratings. This morning Fitch downgraded Credit Agricole to A+ with a stable outlook from AA- with a negative outlook.

Fergus McDonald, head of bonds and currencies at Tyndall Investment Management in Auckland, notes that holding the subordinated paper of a European bank  - like Credit Agricole's perpetual deeply subordinated notes which rank just ahead of equity in a wind up scenario - probably isn't the most desired type of asset these days. Tyndall holds a tiny amount of the notes, "about 100th of 1%" of its funds under management, McDonald estimates.

As he points out, central banks and governments tend to protect senior bond holders but not subordinated bond holders.

"So if a bank gets recapitalised or what have you, it tends to be far more likely that subordinated debt holders and perpetual bond holders will - on any rescue - be asked to contribute. And being asked to contribute is really by taking a haircut on the value of their bonds."

With perpetual bonds like Credit Agricole's there's an expectation, but not obligation, investors will be repaid within a 10-year timeframe. The Credit Agricole notes have a first call date of December 19, 2017. However, McDonald suggests this repayment timeframe probably only applies in normal times.

"Perhaps in tough times they (subordianted bond investors) can only really be repaid if the regulatory authorities give permission. So I guess with a toughening up of the capital requirements under Basel III (bank) capital is harder to come by and if the perpetual are deemed to be part of the capital of a bank, it's pretty hard to give capital back rather than retain it in today's environment," McDonald said.

He suggested this means there's a chance the perpetual Credit Agricole notes will either not be repaid as early as expected, or in a worst case scenario, investors may face a haircut.

'Me too'

Back in 2007 Credit Agricole's New Zealand debt issue was a curious one given it has no operations here. But perhaps there was an element of "me too' involved.

Credit Agricole's issue closely followed a record New Zealand non-government debt issue of NZ$900 million by Dutch bank Rabobank, which does have operations in New Zealand.

Rabobank's perpetual callable bond issue in September 2007 initially sought to raise a minimum of NZ$400 million, but was open to unlimited oversubscriptions. Ultimately it raked in a further NZ$500 million with Kiwi investors, fleeing the finance company meltdown that was in full swing, enticed by the bank's highest possible AAA credit rating from both Standard & Poor's (S&P) and Moody's and no US subprime exposure.

Credit Agricole, with two of Rabobank's lead managers in its corner in Credit Suisse and First NZ Capital, perhaps decided the opportunity to grab a slice of Kiwi investor money was too good to miss. Like Rabobank, Credit Agricole's offer of perpetual deeply subordinated notes initially sought to raise NZ$400 million and was open to unlimited oversubscriptions.

Things didn't go to plan

Credit Agricole, however, only managed to raise NZ$250 million and was forced to increase the margin on its notes to 1.90%, from its indicative range of 1.30% to 1.50%, over the five-year swap rate. The notes initially paid annual interest of 10.035%, were priced at NZ$1 each with minimum applications from investors set at NZ$5,000. The notes launched with an A credit rating from S&P, Aa3 from Moody's Investors Service and AA- from Fitch Ratings. S&P now rates them BBB-, its lowest investment grade rating.

The interest rate is reset after five years (2012) at a margin of 1.9% above the 5 year swap rate (see interactive chart below). After 10 years the interest rate is reset at the 1.9% margin over the 90 day bank bill rate.

The NZX listed securities are now trading at just 42.5% of their face value. See Credit Agricole's issue profile here and details of the issue here.

The bad news has come out of Credit Agricole thick and fast since the New Zealand issue. It largely stems from Credit Agricole's metamorphosis from its simple origins in the agriculture sector to major international expansion, with the bank now planning to quit 21 of the 55 countries it operates in and end its activities in areas such as equity derivatives and commodities.

Within hours of listing the NZ$250 million of bonds on the NZX debt market Credit Agricole revealed a €2.5 billion hit from the US subprime mortgage crisis. The bank wrote down investments in collateralised debt obligations (CDOs) stemming from investments made by Calyon, Credit Agricole's investment banking arm. Not long before the New Zealand debt listing, Credit Agricole had disclosed 850 million worth of subprime losses, its initial subprime hit.

And, although the prospectus said Credit Agricole had "moderate" exposure to US subprime mortgage debt and Calyon's indirect exposure was "very limited", Credit Agricole has - since  2007 - recorded close to €12 billion worth of writedowns and provisions from the likes of CDOs linked to US residential mortgages.

The bank shored up its balance sheet through a deeply discounted €5.9 billion rights issue  in mid- 2008, followed by France's state owned investment company buying 3 billion worth of Credit Agricole perpetual super subordinated notes in December 2008.

Greek, Italian exposure too

The bank's exposure to the world's big financial crises didn't end with toxic subprime mortgages in the US. The investment statement for the New Zealand issue boasted of Credit Agricole's 72% stake in Emporiki, Greece's number four bank in terms of total assets, and of its late 2006 and early 2007 acquisitions of Cariparma, FriulAdria and 202 Banca Intesa branches, giving it a network of 663 branches in Italy. It spent about €2.2 billion in 2006 on securing a controlling stake in Emporiki.

Credit Agricole's most recent financial results showed a 65% drop in third quarter net income to €258 million and the bank booked a €905 million pre-tax writedown on Greek sovereign debt. Losses at Emporiki doubled to €397 million in the third quarter.

Meanwhile, Credit Agricole held €6.54 billion worth of Italian sovereign debt at the end of September and €1.4 billion worth of Spanish government bonds. Recent stress tests by the European Banking Authority show Credit Agricole had no additional capital needs as of September 30, although this news was  met with skepticism in some quarters.

Credit Agricole also has operations in Spain and Portugal, who alongside Greece, Italy and Ireland make up Europe's so-called heavily indebted PIIGS. The writedown announced overnight includes €1.3 billion to reflect the shrinking of its investment banking business and €1.23 billion of writedowns of minority stakes, including those in Spain's Bankinter and Portugal's Banco Espirito Santo.

Staff losing their jobs include 1,750 at Credit Agricole's corporate and investment bank, which employs 13,000 people, and 600 at its factoring and consumer finance arms. Most of the job cuts are happening internationally, although 550 French investment banking and 300 consumer finance jobs will go.

Rabobank's mammoth NZ$900 million issue not delivering

As for Rabobank's massive NZ$900 million issue, it's currently not flavour of the month with some retail investors.

The initial interest rate was set in October 2007 at 9.482% reflecting a margin of 0.76% over the one-year swap rate. However, the interest rate is reset annually on October 8 and this is the problem for investors. Because the one-year swap rate is now much lower, the Rabobank perpetual securities are now paying just 3.70% and are trading at 76% of their face value.

S&P recently stripped Rabobank of its prized AAA credit rating, downgrading the bank two notches to AA, as the credit rating agency applies its new ratings criteria to the world's banks. Despite the downgrade, McDonald said he doubts anyone would question that Rabobank is still going to be around for a "mighty long time."

"If you want to have any kind of exposure to European  banks, or indeed any global banks, Rabo would probably be the pick of the bunch," McDonald said. Tyndall holds Rabobank bonds.

The key question for bond investors

McDonald reckons the first question an investor ought to ask themselves about bonds is why are you buying bonds in the first place?

"And probably it's for safety, security and income," he said.

Then it's important to figure out where you are in the repayment rankings should a company fall on hard times.

"The more you go down the balance sheet of a company and the type of investment you're buying, the greater degree of risk and therefore the greater return you should expect."

Perpetual bonds are at the bottom of the heap in terms of the order of repayment for a bank's debts, should it strike trouble, just above shareholders funds.

Ahead of perpetual bonds are any covered bond holders, senior unsecured bonds, and tier two subordinated debt like the five plus fives - or subordinated issues callable after five years issued by many New Zealand banks -  and then tier one stuff like perpetuals. The latter tend to have features like dividends or coupons that potentially can be deferred or done away with.

That said, McDonald noted that generally speaking only organisations with high quality credit can issue perpetual bonds given their length of issue.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Nice article Gareth.

Credit Agricole may be little known here but it is a French Bank, my take is the French Government could not let it fail or the French farmers would lynch whoever they felt was responsible. I mean that quite literally.

You are probably right Roger. And my guess is that, if it comes to it, bailing out NZ investors will be near the bottom of the list for the French government.

Incredible to think Kiwi actually invested in this dying bank...don't be so sure the French govt will bail out non French owners of the crap bonds...

Probably some cycling junkies hooked in on brand recognition when Julian Dean was cycling for their team. Would have been back round then.

Heh.  For several years between 2000 and 2009 we foolishly paid BNZ Private Banking services 1.5% p/a to manage our portfolio.  With careful judgement, they purchased these CASHA bonds to make up about 10% of our bond mix.

We recently ditched BNZ and now select our investments by throwing darts at the financial pages of the Dom Post.  It has been a much more successful strategy so far.

Little known here maybe, but huge in France - leader for personal and small business banking. My parents have all their accounts with them I think. Oops.

Ambrose is (almost)always a must read. If the need arises domestically, of coarse the chinese will devalue further. It will be in their best interest. Who's going to stop them? If the Euro keeps tanking(major, or the biggest export destination?) ala the last few days they will have little choice, no?

Yes correct Hugh – and the big “Chinese Unrest Bubble” is one to watch. and


Chinese play the long game as is oft acknowledged then ignored. They have a few more options than the west at present and in the longer term I suspect. Not that I deny that  bubbles have been a brewing. It would be prudent to hold fire and sort our own backyard before pronouncing 'check their gig out, they are screwed!'.  Still, gotta love AEP's rhetoric. He's good. Step up your game BH! A few latin phrases requiring a quick wikipedia gets my head humming! 

(figured out how to reply - genius)

"Traders placed heavy bets against the euro on Wednesday in an alarming sign that patience with the glacial political process is running out."

So now the markets are moving to wanting the EU to collapse, they smell flesh and they want their bite?

"The point where there are no longer enough naive fish for the cut-throat "sharks" to feed on."


"ZeroHedge has been gradually piecing together what little we know about these "dark pools" to arrive at a more complete picture of how big this shark-infested game really is. It turns out that the total notional value of outstanding "over the counter" derivatives rose to a record $707 trillion in the first half of 2011, which was a $107 trillion increase in six short months."


"Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. "


Steve Keen and Nicole Foss on money/credit


Credit Agricole's perpetual deeply subordinated notes which rank just ahead of equity in a wind up scenario - probably isn't the most desired type of asset these days. 

This type of instrument is wholly unsuited for a retail investor either directly or through a  fund. 

They require constant coupon and duration management with futures contracts.

They should only be offered to registered 'habitual investors' - even then they would be difficult to manage in the southern hemisphere due to the total lack of liquid term futures contracts available in Australia. 

The only easy money to be made is in cash and carry trades on Government bonds - and that scenario precludes 99.0% of retail customers as the banks want to participate along with your risk by overcharging on the short term borrowing leg. Hence negating the carry.  

@ the.jxc Heh.  For several years between 2000 and 2009 we foolishly paid BNZ Private Banking services 1.5% p/a to manage our portfolio.  With careful judgement, they purchased these CASHA bonds to make up about 10% of our bond mix. 

This is totally unacceptable on all levels of prudent retail investment criteria.

I guess the employed adviser would have had little skill in pricing the instrument to potential call/reset never mind hedging the reset risk. 

I hope you complained to the highest level.

Caveat emptor should not be an acceptable get out clause for this type of retail investment . - they are only suitable as bank to bank deals.  

We left the BNZ a year or so ago. Best move we ever made.  All of a sudden, we started at least breaking even, without the 1.5% fees dragging us down.  

Actually, in some cases the fees were higher, since in one case BNZ put us into an AXA managed fund (AXA are course closely linked to BNZ's investment services).  So we paid fees twice on that fund.  No wonder we weren't making any profit!

My purely personal and unqualified advice to anybody considering entering a similar arrangement with a similar "private investment service" because you're "too busy to take care if it yourself" would be... throw your money in an index fund and high-grade non-perpetual bonds instead.  You'll sleep better for it.

As for complaining now about CASHA, as an ex-customer?  I truly cannot imagine it doing anything other than generating paperwork and raising my blood pressure.

Superb article Gareth. Many thanks.

+1 from me too. Mostly I check here for interesting links etc. but find most of the opinion pieces here seem to be to just stir up a bit of debate. Which is good. But these kinds of well researched articles certainly have me reading right through. Keep it up Gareth.


Yep, plain english.

As I have repeatedly stated, GET PHYSICAL.  McDonald reckons the first question an investor ought to ask themselves about bonds is why are you buying bonds in the first place? 

Chinese play the long game as is oft acknowledged then ignored. They have a few more options than the west at present and in the longer term I suspect. Not that I deny that  bubbles have been a brewing. It would be prudent to hold fire and sort our own backyard before pronouncing 'check their gig out, they are screwed!'.  Still, gotta love AEP's rhetoric. He's good. Step up your game BH! A few latin phrases requiring a quick wikipedia gets my head humming!


Re covered bond purchases

There is only one NZD issue - BNZ ~$450m, the rest are denominated in Euros.

I am sure a local broker dealer could check availability for the NZ tranche.

And while the local issue is RP eligible the RBNZ has not been offered any as collateral. 

They could be locked up in some term funds.

I personally have no interest at this juncture   

Gareth, you wrote about the Credit Sails (CDS) issue into NZ in the last few years, where NZD 91 million were lost, most by retail investors in NZ. Wasn't  Credit Agricole the French bank who indirectly sponsored this product into NZ?

Big Greek hit to Credit Agricole's annual results -

Credit Agricole's first quarter profit down 75% after E940 mln net losses from Greek subsidiary Emporiki Bank -