By Mark DeBree, CFA, Catalyst Strategic Solutions Managing Principal
With the first quarter of 2022 in the books, analysts at Catalyst Strategic Solutions have seen a large uptick in credit unions seeking to issue subordinated debt. Capital amounts issued to credit unions are ranging from hundreds of thousands of dollars to hundreds of millions.
The specific business case for each issuer has varied, but the core underlying drivers have been consistent.
Four primary drivers are prompting the growth in subordinated debt. They are:
- Restoring regulatory capital
- Facilitating expansion (organic or acquisitions)
- Supporting accelerated growth levels
- Investing in technology/enhanced member experience
Rather than a single driver, almost every planned issuance in 2022 has contained some combination of the four key focus areas listed above.
For example, our experience shows that credit unions are seeking to rebuild their net worth positions, but they also want to expand their geographical footprint, invest in new technology, and even seek bank or credit union acquisitions. This illustrates how subordinated debt issuances can benefit credit unions – supporting them in achieving business goals and objectives that are limited by current net worth levels.
If you have ideas or business opportunities that you’re unable to execute because of your credit union’s net worth, subordinated debt may be an ideal solution. With maturity terms ranging from 5-20 years and the ability to include prepayment/call provisions, issuers have flexibility to create structures that align with their unique business strategies and needs.
However, subordinated debt does not work for everyone. Eligibility is limited to low-income designated credit unions, complex credit unions, and new credit unions. The biggest benefit accrues to credit unions granted a low-income designation by the NCUA, as these credit unions are eligible to count subordinated debt directly towards net worth.
Need resources to put your plans into action? Subordinated debt is the solution to turn your ideas into reality. And Catalyst Strategic Solutions can help. For more information, contact us today.