UPDATE 1-Basel leaves banks in dark over hybrid bonds

Mon Sep 13, 2010 9:27am EDT

Related Topics

* Basel leaves some key questions unanswered * Banks face hybrid redemptions amid regulatory uncertainty

(Adds further comments by analyst, trader) By Jane Merriman

LONDON, Sept 13 (Reuters) - European banks poised to sell new hybrid bonds in the coming weeks to refinance billions of euros of debt might have to hold off due to uncertainty over their status under the new Basel III capital rules, bankers and analysts say.

The Basel Committee on Banking Supervision's new capital requirements , unveiled at the weekend, aim to make banks safer and prevent a repeat of the credit crisis. [ID:nLDE68C0R0] [ID:nLDE68B0BP]

The regime will be phased in in stages from Jan. 1 2013, but questions remain over the final shape of new hybrids that regulators want banks to hold. And in the meantime, some banks have hybrids to refinance.

Traders and analysts say most of these bonds are likely to be redeemed.

"The asset class is now effectively in run-off mode and we are unlikely to see much (if any) supply now of debt in this format," Suki Mann, strategist at Societe Generale said in a note.

Banks have used Tier 1 hybrid bonds in the past to help boost their capital. These instruments have equity-like characteristics, but are cheaper than equity partly because coupon payments have been tax-deductible.

Under the new Basel rules, regulators want them to be even more like equity, with more loss-absorbing features, making them more costly for banks to sell to investors who will want higher coupons for taking on the extra risk.

"Basel has said where the problems are," said one financials credit trader, referring to regulators' dissatisfaction with the ability of existing hybrids to absorb losses in times of stress.

"But they've not come to a conclusion as to how to proceed from here," he said.

Hybrids with "contingent" features that can absorb losses more effectively will be expensive for banks to issue and, at the moment, most investors won't buy them, he said.

REDEMPTIONS

There are some 24 billion euros of Tier 1 bonds with redemptions coming up for European banks in 2010 and 2011, according to data from Bank of America Merrill Lynch.

These banks will have to decide whether to redeem them and replace them but the regulatory uncertainty will not make this easy.

Italian bank Intesa Sanpaolo (ISP.MI), for example, has a 1 billion-euro Tier 1 bond redemption due in November. [ID:nLDE6891IO]

The Basel Committee has said only bonds issued before Sept. 12 should qualify for its transition arrangements.

"It looks to us as though only Tier 1s issued before the weekend will be grandfathered if they don't meet the new conditions," said Simon Adamson, analyst at CreditSights.

"Instruments issued from now onwards will only qualify for inclusion in Tier 1 if they meet the loss absorbency criteria laid out in the recent proposals and those proposals are open to consultation until the beginning of October," CreditSights also said in a note. "There is likely to be a hiatus in new issuance of hybrid Tier 1."

Uncertainty over the new Basel rules had kept a lid on new issuance of hybrids this year. But an upbeat mood in the bond markets this month has helped spur some deals.

Italy's Monte dei Paschi di Siena (BMPS.MI) and Lloyds (LLOY.L), for example, did Lower Tier 2 bonds earlier at the beginning of September.

More were expected to follow. [ID:nLDE6810HR]

"You have a situation of ambiguity rather than clarity," said a capital specialist at an international banking group. "The Basel press release does not give clarity for deals in the pipeline," he said.

"Where issues are on an opportunistic basis they may be put on hold, but some banks could decide to go ahead as coupon levels are attractive at the moment."

The Basel announcement helped boost the prices of bank hybrid bonds in the secondary markets on the assumption there will now be limited new supply.

A Commerzbank 5.012 percent Tier 1 bond, for example, was bid at 69 percent of face value, up 4 points on the day, one trader said. (Editing by Jon Loades-Carter, Greg Mahlich)

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