Building the buffer: FLAC issuance takes shape

Ten months after First Loss After Capital (FLAC) instruments were introduced, banks have issued c.R52 billion. But with softer demand emerging from September, what is the market telling investors?

Since the introduction of FLAC instruments in January 2026, South Africa’s FLAC market has seen significant issuance volumes, alongside some surprising shifts in market dynamics.

Read: An evolution in SA's banking resolution

Issuance to date

FLAC issuance to the end of October 2026 has totalled c.R52 billion, exceeding Senior Unsecured redemptions by c.R8 billion and absorbing an increasing share of market liquidity. This scale of bank issuance has investors watching their single name limits closely. This, together with scarce State-owned Enterprise (SOE) supply, has driven strong demand for corporate paper, as illustrated by high subscription cover ratios and many corporate auctions continuing to clear sizeably below pricing guidance.

Read: The forces reshaping South Africa's credit market

There are, however, signs that investors are becoming increasingly unable to absorb issuance volumes at current levels, resulting in waning demand.

Figure 1: Primary market FLAC issuance and pricing

Source: Standard Bank research, JSE, Futuregrowth

Standard Bank has been the largest FLAC issuer in 2026, with issuance volumes totalling R22.7 billion, followed by ABSA, Nedbank and FirstRand, at R11.7 billion, R7.8 billion and R7.7 billion respectively. Investec has privately placed only R2.4 billion of FLAC paper, reflecting its much lower estimated baseline minimum FLAC requirement (bMFR) at the end of the six-year phase-in period, which is c.50–70% lower than the other big five banks.

FLAC issuances have also seen sizeable participation from Development Finance Institutions (DFIs), which accounted for 20% of total volume. The International Finance Corporation (IFC), for example, subscribed to R1.7 billion of FLAC paper from each of Standard Bank, FirstRand and ABSA.

Standard Bank also privately placed R5.4 billion of FLAC notes with the African Development Bank. In the case of IFC participation, issuers stated that these allocations were additive to the auctions and priced at the clearing spread.

We remain watchful of how continued DFI participation affects auction allocations and clearing spreads, and whether it adheres to ASISA’s debt-market guidelines.

Figure 2: FLAC issuance volume by bank

Source: Auction outcomes, Futuregrowth

Supply and demand

The majority of FLAC paper has been issued within the 6NC5 and 8NC7 tenors1. In contrast, average subscription cover ratios have been highest for 4NC3 and 6NC5 notes, at 2.0x and 2.2x respectively, indicating that investors remain biased towards shorter tenors while banks prefer longer-term funding. From the banks’ perspective, the preference for longer tenors makes sense: any debt maturing or reaching its call date before 31 December 2031 will need to be refinanced, in addition to the issuance required to support the bMFR build-up.

Investec is the only bank that is still actively issuing Senior Unsecured paper, which, given its relatively lower bMFR, helps to lower its net funding cost. All FLAC paper issued by the bank has been through private placements, and it is the only bank to issue 5NC4 FLAC paper.

As part of total FLAC issuance, R13 billion of sustainable and social FLAC notes was issued by FirstRand and Standard Bank in the ten months to October. The proceeds from FirstRand’s issuance are to be used to support lending and financing activities for green projects, including climate-friendly and other environmental purposes, as well as social projects such as social infrastructure and affordable housing. Standard Bank’s social FLAC notes are intended to support increased lending to small and medium enterprises. The demand for these notes was not materially different from other FLAC issuances, suggesting that investors may not have valued sustainability-labelled bank funding differently.

Figure 3: Primary market issuance per tenor

Source: Auction outcomes, Futuregrowth

Pricing

FLAC primary market clearing spreads have evolved notably over the period under review. Since their introduction in January 2026, spreads across all FLAC tenors tightened steadily through to August 2026, by between 5bps and 9bps, reflecting sustained demand. Tightening was most pronounced in the 4NC3 tenor. Auctions remained well subscribed over this period, with issuance volume bolstered by DFI participation, despite declining subscription cover ratios.

In September 2026, Nedbank’s FLAC auction recorded the lowest book size for a FLAC issue to date, with bids just shy of R2.2 billion, of which just over R2.0 billion was placed. Spreads widened across all tenors by an average of 5bps, with the 5NC4 tenor widening the most at 7bps. For investors, this marked a welcome reversal, restoring some of the subordination premium that had been steadily eroded by excess market liquidity. Subscription cover ratios also declined to between 1.0x and 1.1x across the various tenors, a far cry from the 7.0x and 6.1x subscription levels for 4NC3 and 5NC4 respectively when FLAC instruments were first introduced in January 2026.

ABSA’s FLAC auction on October 27 saw auction results skewed by DFI participation. Given the DFI’s pre-disclosed appetite for the 6NC5 and 8NC7 tenors, the bank issued a minimal amount to market for those tenors, thereby setting the clearing spread, arguably lower than it otherwise would have in an ordinary Dutch auction.

Capitec issued its first FLAC notes in November 20262, after the bank amended its Domestic Medium-Term Note programme to enable the domestic issuance of FLAC instruments from the ultimate bank holding company as required by Prudential standards. Capitec had largely been absent from South Africa’s debt capital markets in recent years, with its previous bond issuance in c.2023. The bank issued R2.5 billion across 3-, 5- and 7-year floating rate notes, with spreads clearing at 92bps, 109bps and 114bps respectively. This was c.3 – 6bps below pricing guidance and tighter than spreads at recent big five bank auctions. The average subscription cover ratio was 2.7x, with demand seemingly driven by portfolio diversification benefits.

Figure 4: 3-, 5- and 7-year FLAC clearing spreads and cover ratios

Source: Auction outcomes, Futuregrowth

Given the expected c.R360 billion total bMFR FLAC requirement over the six-year phase-in period, investors may find it increasingly difficult to absorb current issuance volumes. This may, in part, be due to current regulations that do not yet explicitly accommodate FLAC instruments.

Medical schemes under Annexure B to the Regulations of the Medical Schemes Act appear unlikely to be able to invest meaningfully in FLAC instruments, given the limits imposed (2.5% of the aggregate fair value of total assets of the scheme, compared with a limit of 20% for Senior bank paper). Additionally, under the Prudential Authority’s insurer capital rules, FLAC instruments carry a higher capital charge through a higher loss-given default adjustment, possibly limiting insurers’ appetite for these instruments. For money market and short-term debt portfolios, Board Notice 90 under the Collective Investment Schemes Control Act (CISCA) heavily restricts allocations to subordinated bank debt.

As banks are unlikely to issue material volumes of senior paper in future, the risk profile of FLAC instruments should align closely with that of senior paper as the bMFR builds within the six-year phase-in period. This strengthens the case for regulatory authorities to better accommodate FLAC issuances within prescribed investment limits. Without this, the investor base for FLAC could remain severely constrained.

The number of bidders in FLAC auctions has also trended downwards since the instrument was introduced. With such a small pool of bidders, even a handful of investors can have a meaningful impact on both clearing spreads and volumes placed.

Figure 5: Number of bidders per FLAC auction

Source: Auction outcomes, Futuregrowth

The buffer is building, but at what price?

Ten months in, the FLAC market has shown that it can absorb large volumes: c.R52 billion has been issued, and auctions were well subscribed for most of the period. September, however, suggests that this capacity may be finite. Books were thinner, the number of bidders has trended lower since January, and clearing spreads widened by an average of 5bps across all tenors as cover ratios fell as low as 1.0x.

The issuance task is far from complete. Banks must still build towards their bMFR by the end of the six-year phase-in period; paper maturing or reaching its call date before 31 December 2031 will need to be refinanced in addition to this requirement.

For investors, there is an opportunity to rebuild some of the subordination premium eroded by excess liquidity. For banks, this points to a higher and less predictable cost of building the buffer. That cost, as indicated by clearing spreads, is influenced by a range of factors, including credit view, liquidity, subordination premiums, relative value and investor appetite, which may be impaired by regulatory and mandate constraints and DFI participation.

The question for the rest of the phase-in period is therefore no longer whether banks can issue FLAC, but at what price investors will continue to support it.