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US banks no-call: time to move on
LONDON, April 27 (IFR) - The decision by JP Morgan and Bank of America this week to skip calls on some of their European Lower Tier 2 debt predictably raised tempers among the bond investor base as yet more banks decided to break market convention.
Yet, as Deutsche Bank and Santander have proved before, not calling doesn't mean that you will remain a market pariah forever.
Regulators always treated optional calls in Lower Tier 2 as optional, while the market, at least at first, priced in a call at the first available date. This divergent treatment helped fuel the original issuance of callable Lower Tier 2, and banks took the benefit of the resultant arbitrage.
Grudges only last as long as an issuer doesn't offer value. Come with a yieldy deal (take a bow, Santander covered bond) and it turns out economic interest overrides principles, on the buy-side as much as the issuer side.
To the credit of the investor community, Bank of America's Lower Tier 2 was priced to maturity, not to call. Expecting a bank facing at least USD50bn of lawsuits to donate spare cash to charm Europe's investor community was always going to be a long shot.
So JP Morgan emerges as the real villain of the piece - declining to call a deal which had been priced to call. But the same investors that are grumbling about the unfairness of it all will come straight back in a year or so, and the credit spreads of one of the world's largest banks will barely move.
But perhaps more importantly, this is a sign of the times. A lot of banks' drive to call a deal was to do with reputation and their ability to issue further debt.
When it comes to subordinated debt, bond investors that bought old-style subordinated bank debt are showing a marked reluctance to buy new-style instruments, regardless of who the issuer is and whether they have a trackrecord of calling deals - meaning keeping that buyer base happy is even less important.
Bankers and investors alike find life easier when issuers behave themselves and call on time. But this is yet another warning that economic self-interest trumps imaginary contracts. Maybe it will sink in this time.
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