Junior bondholders shaken but wider debt repricing unlikely

Fri Feb 15, 2013 11:12am EST

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By Aimee Donnellan

LONDON, Feb 15 (IFR) - The potential acceleration of senior bank bail-ins and increasingly aggressive treatment of subordinated bondholders in distressed banks have focused investor minds, but despite a knee-jerk widening few expect a broad repricing of financial debt.

Junior bondholders have been dealt a number of blows over the past three weeks. After the Dutch government's shock decision to nationalise SNS Reaal and write subordinated bonds down to nothing, investors in Spain's Banco de Valencia were hit by a similar move.

The troubled Spanish lender this week said it would write off as much as 90% of the value of its subordinated debt in a bid to restructure without relying on public aid.

And in a similar vein, compatriot Bankia is thrashing out an equally aggressive restructuring that could leave investors, including retail accounts, with equity in the failed bank.

The market reaction to the Spanish announcements has been surprisingly muted. Following the nationalisation of SNS, the gap between the Senior and Subordinated iTraxx indices widened to around 116bp, but has since come back in to less than 100bp.

It is clear that SNS gave investors a fright, but that is likely to lead to a more selective approach to credit analysis rather than an all-out retreat from the FIG market.

"Investors need to distinguish between banks that can raise private sector capital if needed, and those that will struggle should they need a capital injection in 12-18 months time," said Satish Pulle, a portfolio manager at ECM.

WAKE-UP CALL

Bondholders had taken for granted regulatory forbearance in bank restructurings. But those days are clearly over.

"The Dutch regulator's action on SNS has now set a precedent that is likely to be followed by others," said a London-based hybrid banker.

"This is not only a wake-up call for institutional investors but for retail accounts that are exposed to a number of restructured Spanish banks."

Bankers are now warning that the bold move by regulators could extend to senior bondholders, who so far - except for those in Denmark - have been left untouched in European bank restructurings.

"It feels like regulators are getting more aggressive, even in the periphery, and for that reason I think we're likely to see the bail-in brought forward to 2015 rather than 2018," said another London-based hybrid capital banker, referring to EU plans to impose losses on senior bondholders.

Issuers are confident that investors are already adapting and are unlikely to retreat from the FIG market altogether.

"The market has recovered for decent credits," said Waleed El-Amir, senior vice-president of UniCredit's strategic funding and investments business.

"I'm sceptical that senior bondholders will be bailed in ahead of the 2018 deadline because almost all of the regulatory proposals have been delayed. However, events like the nationalisation of SNS are likely to increase the funding costs of weaker banks (and) that will now be in focus."

Bankers say investors holding paper in loss-making banks such as HSH Nordbank, MPS, Bankia and even Commerzbank risk potential write-downs by regulators.

NO REPRICING

This does not necessarily mean an across-the-board hike in banks' borrowing costs, bankers say.

"Senior bail-in will happen when there is EU-wide regulation but I don't think it'll be an issue for investors - it's just a matter of pricing your risk," said Oliver Gazzolo, global head of credit trading at Societe Generale.

"We've already seen the FIG market mature and a definitive and clear regulation will help investors to deal with these changes."

Indeed, the FIG market has a number of precedents of a knee-jerk reaction to credit events causing bank spreads to widen, only for the market to stabilise and recover following investor acceptance of heightened risk.

Last year, a legislative draft published by the European Commission proposed that senior debtholders be able to take losses from 2018 onwards, but the ramifications have been limited.

"Issuers have already been selling senior debt beyond 2018 which means that for the last few years of these deals they could be subject to bail-in if the bail-in regime is implemented as currently proposed," said Gerald Podobnik, head of capital solutions at Deutsche Bank.

"This hasn't stopped banks from being able to sell long-dated senior debt." (Reporting by Aimee Donnellan; Additional reporting Christopher Whittall; Editing by Alex Chambers & Julian Baker)

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