Background
In 2015 the German legislator subordinated senior unsecured bonds of banks to help German banks to meet the Minimum Requirement for own funds and Eligible Liabilities (MREL) and Total Loss Absorbing Capacity (TLAC). Other European countries, though, ensured that their banks could continue to issue preferred senior bonds which are priced differently from the lower ranking German subordinated senior bonds.
To achieve a level playing field for German issuer banks, the German legislator has now amended the German Banking Act (Kreditwesengesetz - KWG) to allow for two different classes of senior bond issues. From 21 July 2018 German banks can choose to issue senior preferred and senior non-preferred bonds.
The legal change
The German legislator made a couple of amendments to section 46f paragraphs 6, 7 and 9 KWG with effect as of 21 July 2018.1 They apply to German bank senior debt issues and implement an amendment of the EU’s Bank Recovery and Resolution Directive (BRRD) effective as of 28 December 2017 aimed to improve consistency between creditor hierarchies across the EU in German law. If the terms and conditions of the securities to be issued do not provide otherwise, such issues count from 21 July 2018 as senior preferred issues. Only if it is explicitly stated in the terms and conditions of the securities the lower non-preferred ranking shall apply to such new issue.
Senior unsecured bonds issued prior to and including 20 July 2018 now rank pari passu with non-preferred senior bonds under the new wording of section 46f KWG (please refer to section 46f para 9 KWG). They will lose ECB eligibility with the expiry of 31 December 2018. However, this grandfathering is only available for issues prior to 16 April 2018, as set out in the amended ECB eligibility criteria as of February 2018.
It is expected that numerous German banks will make use of the new asset class and issue senior preferred bonds, because those issues will benefit of a higher issue rating and be less expensive. In addition, the new preferred senior bonds are eligible as ECB collateral.
1 Article 8 of the German law of 10 July 2018 on the exercise of options under the EU- Prospectus Regulation and adjustments of further finance market acts (BGBl. I p. 1102)
