Peripheral banks' senior ambitions hinge on restructurings
* Spanish bank restructuring prompts senior bond haircut jitters
* Peripheral banks may be pushed down covered path
* Funding differential between senior and covered may widen
By Aimee Donnellan
LONDON, Nov 30 (IFR) - Peripheral European banks may struggle to convince investors to buy their unsecured debt as fears rise that bank restructurings could result in haircuts for senior bondholders, market experts say.
Concerns have been exacerbated by plans announced this week to halve the size of the balance sheets of three nationalised Spanish banks - Bankia, Catalunya Banc and Novagalicia Banco - over the next five years. While a fourth, Banco de Valencia, will be sold off.
The nationalised banks will have to cut jobs and impose losses on their creditor bondholders in exchange for a eurozone rescue.
The European Commission said the cost to hybrid and subordinated bondholders in the restructuring of all four of the nationalised banks will come to about EUR10bn.
Although senior bondholders have so far been immune from haircuts throughout the financial crisis, there is a fear that this will change.
"Investors are now thinking about future restructurings, and some, for the first time are carefully going through their documents to see if they are protected under the relevant legislative framework," said Harman Dhami, head of FIG syndicate at RBS.
As a result, some issuers in weaker jurisdictions may have little option but to issue covered bonds rather than senior unsecured debt, even if they would prefer to issue the latter.
"For a lot of peripheral banks it's more important to be doing secured funding over unsecured," said a DCM banker.
"I'm not sure we are through with restructuring of banks, so to my mind it makes sense to be supported by an underlying pool of assets."
Covered bonds are ultimately cheaper for issuers, but some banks have been willing to shoulder the extra cost of unsecured debt in order to keep enough assets on their balance to use as cheap collateral with the ECB. Over the past week, banks from bailed-out eurozone countries have opted for different instruments.
Ireland's Allied Irish Banks and Portugal's Caixa Geral de Depositos (CGD) launched secured and unsecured deals, respectively, this week. The price differential between the two asset classes was around 250bp, but bankers say there is a risk that this could widen if sovereign volatility picks up next year.
AIB's first public wholesale market trade since the collapse of the country's banking system, a EUR500m three-year covered bond, sold at 270bp spread over mid-swaps.
The deal gave investors a coupon of 4.125%, which was well inside the 5.75% coupon at which state-owned Portuguese bank CGD priced a three-year senior unsecured issue this week.
CGD, like country peer Banco Espirito Santo (BES) earlier in late October, favoured senior bonds over covered in order to retain precious mortgage collateral, which treasurers and bankers say is a priority for many of Portugal's banks.
BES's EUR750m three-year unsecured transaction was the first public bond to be sold by a Portuguese bank since 2010 and paid a hefty coupon of 5.875%. The issuer, however, said it was pleased with the outcome.
Covered bonds offered a 100bp cost benefit for BES but, by going down the senior unsecured route, it will have been able to retain precious ECB-eligible assets.
Irish financial institutions, including Bank of Ireland as well as AIB, have a different strategy.
Those issuers have opted for covered bonds in the hope that the cheaper funding they provide will enable them to pay back ECB money as soon as possible.
This, bankers say, will make them more attractive to investors that are fearful of bank restructurings.
Those fears could mean that Portuguese banks may be forced to issue covered bonds if investor demand wilts for senior debt.
Covered bonds, on the other hand, offer dual recourse to a pool of underlying assets as well as the issuing bank. They are typically higher rated than unsecured bonds.
AVOID "PERIPHERAL PERIPHERALS"
Investors say assessing the relative value between covered bonds and senior debt is difficult, especially as the link between banks and their sovereigns has not been broken.
"Until we have one global regulator and the ESM is able to capitalise banks directly, there will still be a link between sovereigns and banks," said Marc Stacey, portfolio manager at BlueBay. "Those troubles are still there and need to be priced in."
Other investors are less willing to do the credit work on financial institutions in so-called "peripheral peripherals" -Greece, Ireland and Portugal - as sovereign and banking issues remain a deterrent for bondholders.