The 4 Primary Drivers Prompting Growth in Subordinated Debt

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 to millions of dollars.

The specific business cases for each issuer vary, but four primary drivers have been consistent:

  • Restoring regulatory capital;
  • Facilitating expansion (organic or acquisitions);
  • Supporting accelerated growth levels; and
  • Investing in technology/enhanced member experience.

Rather than a single driver, almost every planned issuance in 2022 has contained some combination of these four key focus areas.

For example, Catalyst’s 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 by supporting them in achieving business goals and objectives that are limited by their current net worth.

Subordinated debt may be an ideal solution for credit unions to execute on previously unfunded ideas or business opportunities. With maturity terms ranging from 5-20 years and the ability to include prepayment/call provisions, issuers have the 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 may be the solution to turn your ideas into reality. For more information, visit Catalyst Corporate Federal Credit Union online or contact the Strategic Link team today to get connected.

Posted in GoWest Solutions, Industry Insight.