Societe Generale (SocGen)

Societe Generale (SocGen) Trade Idea

The SocGen perps are offering considerable relative value in the current environment with a running yield of around 5%. The prices (and yield) on these perpetual securities (especially the financial sector) have already re-adjusted to markets expectations of higher interest rate expectations. Finally, the call risk on the SocGen perps is lower than other European perps.

SocGen’s exposure to Russia is relatively small in the context of its balance sheet and income statement – 1.7% of total exposure and 2.7% of net earnings. Potential losses in which it would be stripped of its banking assets in Russia (extreme scenario) would be manageable (capital impact estimated at -50bps of CET1 ratio).

In respect of call risk, there are a few things for consideration.

The Implied Reset Coupon at the first call date
The Distance to the Common Equity Tier 1 (CET1) ratio trigger
The Maximum Distributable Amount (MDA) cushion – bank capital ratios falling into the MDA buffer zone raise red flags for investors

For the SocGen perps, call risk is a lot lower than other European perps.

The higher coupon reset of 5yr swap + 4.036% (which today would be just over 6%) would not make it economical to keep these securities outstanding versus where SocGen could issue T1s of similar structure and quality.
The other thing to consider is the cushion to the Maximum Distributable Amount (MDA) as well as the Distance to the Common Equity Tier 1 (CET1) ratio trigger.
On both these metrics, SocGen sits towards the middle (MDA) and upper region (Distance to the CET1 ratio) respectively versus other T1 issuers (see respective charts below).

Chart 1. Distance to Trigger

Source: CreditSights 2022

Chart 2. MDA Cushion

Source: CreditSights 2022

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