CORRECTED-Implicitly guaranteed agencies swept into bail-in pool
(Corrects in fourth paragraph to remove NRW.Bank, L-Bank, Kommuninvest, Rentenbank and Municipality Finance from the list of implicitly guaranteed agencies)
LONDON, July 26 (IFR) - European agencies that have only implicit government guarantees could see their funding costs rise in the coming months if a proposal to apply new bail-in rules to these institutions is rubber stamped at the end of the year.
The Council of the European Union reached a general agreement on the Bank Recovery and Resolution Directive (BRRD) late last month, which deemed implicitly guaranteed agencies as "credit institutions," and therefore to be treated in the same way as banks in the event of a failure.
That effectively means that losses could be imposed on bondholders - and raises the risk that investors will now demand a higher risk premium on debt sold by frequent issuers that fall into this category.
They include Germany's Landesbanken; Bank Nederlandse Gemeenten and Nederlandse Waterschapsbank NV in the Netherlands and SEK in Sweden; according to Barclays.
"We understand there may still be some room for amendments to strengthen the status of agency issuers before the final sign-off of the directive," said Barclays analysts Fritz Engelhard, Jussi Harju and Michaela Seimen Howat.
"(But) with the implementation of BRRD, risk ranking in the SSA segment will gain momentum and result in a revaluation of agency debt, potentially widening spreads for issuers that only benefit from implicit guarantee structures."
LIMITED SPREAD IMPACT
So far there has been no impact on spreads.
Bart Van Dooren, head of funding and investor relations at BNG, said that clients had not raised the issue of bail-in, but that there was the possibility that bond spreads could widen when the directive comes into force.
"Until it actually becomes translated into national law, I would be very surprised to see any impact on spreads."
Trilogue negotiations between the European Council, the European Commission and the European Parliament are now underway, and are expected to be finalised by the end of the year.
Barclays then expects there to be an 18-month period following the finalisation of the directive to transpose it into national law. The opportunity for governments to relax the rules, however, is likely to be limited, Barclays said.
"There are limited possibilities to change the scope of the directive in national law to include exemptions, in our opinion," said Barclays.
Issuers such as KfW, Oesterreichische Kontrollbank, ICO, Caisse des Depots et Consignations, Cassa Depositi e Prestiti and Kommunekredit, for example, are all expected to benefit from exemption structures.
"National laws can be more restrictive, but not looser, than the directive itself. As such, if national governments feel that certain institutions should gain a special status in the context of BRRD, that must be reflected in the final directive."
Even so, both bankers and issuers said that any impact on funding costs would be negligible.
"Bail-in is a big talking point across the whole market, but what people need to think about is the likelihood of an institution getting to such a level of distress that it would actually happen," said one SSA debt capital markets banker.
"Before the financial crisis, SSA investors may have focused more on the ratings. But there are so few Triple A issuers left that investors have become much more sophisticated and look at all aspects such as ownership and structure."
Van Dooren said that the asset quality of issuers also had to be factored into any analysis of bail-in risk for implicitly guaranteed agencies such as BNG.
"Under the articles of association, we are only allowed to finance public sector institutions, and around 95% of our long term assets are guaranteed either directly or indirectly by the Dutch state."
He said that Nederlandse Waterschapsbank had a similarly strong asset base.
"We have been lending for almost 100 years to municipalities and housing associations, and we have never experienced a delay in payment. So even though a directive would have to be applied, it's very unlikely, even impossible, for an agency in the Netherlands to go bankrupt."
Having said that, agencies have had to be bailed out in the past, and in spectacular fashion.
In November 2012, Norway established a government-owned export financing scheme from 2012 and in effect put Eksportfinans, its export support agency at the time, into run-off.
The move left bondholders shell-shocked and led to a seven-notch credit rating downgrade to Ba1 by Moody's, taking the issuer to sub-investment grade territory.
The DCM banker pointed out though, that other issuers have survived years of speculation and still attract solid demand from investors.
"Over the past few years, there was concern that the EIB would be used as a recovery vehicle for Southern Europe, and then for troubled banks, and then whether sovereigns would be prepared to put in more capital if the EIB ran into trouble over its loan exposure," he said.
"Investors have to take all kinds of things into consideration." (Reporting by Natalie Harrison, IFR Markets, editing by Julian Baker)
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