The German Parliament will soon be called to vote on a proposal to move bank senior unsecured debt from a statutory subordination to a contractual subordination regime, mirroring the frameworks already in place in several other European Union countries. Scope views this development positively.

From July 21, senior unsecured bank bonds must be issued with contractual subordination language. The intended changes of § 46f KWG are in line with the EU Insolvency Hierarchy Directive on the harmonisation of the ranking of unsecured debt instruments.

Plain-vanilla senior unsecured bonds issued up to 20 July 2018 are expected to rank pari passu with new SNP debt. Banks will also be able to issue plain-vanilla senior unsecured bonds which will rank above SNP in insolvency or resolution (so-called senior preferred debt) – something that is not possible under the Subordination Law that has been in force since the beginning of 2017.

The new rule should allow German banks to use outstanding senior unsecured debt and new SNP debt for their MREL/TLAC requirements. Once the new rule is in effect, maturing senior debt which is structurally subordinated (in insolvency and resolution) according to the current legislation should be replaced with senior debt which is contractually subordinated (SNP), according to the forthcoming legislation.

Given the continuity of the seniority ranking of the outstanding rated debt of German banks, Scope does not envisage any rating adjustments. As rated German banks start issuing both SNP debt and senior preferred debt, Scope plans to rate it. Based on its existing bank rating methodology (last updated in May 2017), the rating of senior preferred unsecured debt will be at the level of the Issuer Rating i.e. one notch above the rating of SNP debt.