Credit AM: Commentary subordinated debt
By Paul Gurzal, Co-Head of Fixed Income and Jérémie Boudinet, Head of Financial and Subordinated Debt, Crédit Mutuel Asset Management
Market Environment
Subordinated debt experienced a rather quiet August in terms of activity and spread variations, despite a new upward move in sovereign rates. The end of the month was, however, more volatile, with a widening of spreads for French subordinated debt, particularly AT1s and RT1s which followed bank equities, who suffered renewed fears over the French budget deficit trajectory, and the upcoming 2027 presidential campaign.
Over the month of August, Euro insurance Tier 2s underperformed (-0.4% for the month) due to their higher bond sensitivity, while CoCos held steady at +0.2% and once again outperformed other subordinated segments (Bloomberg indices).
Secondary market activity was very limited before the final week of the month, while the primary market was mainly driven by Corporate Hybrid debt issuances. This segment continues to attract new companies, including the Swiss chemical company Sika, which issued two tranches, the telecom operator Swisscom, and Tennet Germany, also issuing two tranches (separate issuer from the Dutch part of the utility group).
Deutsche Börse also isued a new security, and overall, demand was very strong, particularly for Sika, which saw an order book oversubscribed 10 times for its tranche redeemable in May 2035. With over €44 billion issued since the beginning of the year, hybrid issuances have already exceeded the total issuance for the entire 2025. It was quieter on the financial subordinated side, though we still note of a few French issuances (Tier 2 from BFCM and La Mondiale, USD AT1 from BNP Paribas).
The legislative saga surrounding UBS's capital requirements continues. While the Swiss Federal Council wants UBS to cover 100% of its foreign holdings with CET1 capital, a commission wants 50% of these needs to be covered by AT1s, which would equate to additional issuance needs of $13 billion (spread over 7 years).
The commission would also like to tighten the rules regarding calls, coupon payments, and loss absorption in the event of non-compliance with regulatory requirements. These proposals will be further debated and certainly modified in the coming months, but we believe that a tightening of some of these rules will be difficult for UBS to avoid. These changes will have no impact on AT1s other than those of UBS, and we see no 'read-across' for the asset class.
Source: Bloomberg, figures as at end-August 2026