BPE CoCo bond plunges after S&P downgrade

Thu Feb 13, 2014 8:52am EST

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LONDON, Feb 13 (IFR) - S&P's decision to cut Banco Popular Espanol's rating further into junk territory sent the price of the bank's Additional Tier 1 bond tumbling on Thursday as the ratings agency called into question the lender's future.

S&P cut the issuer's long term debt rating by a one notch from BB- to B+ and placed it on negative watch, citing a weaker financial and business profile.

"The magnitude of Popular's problem assets, as well as their continuing deterioration, have negative implications for Popular's business stability," S&P said in a note.

Spain's fourth largest lender's non-deferrable subordinated debt was also lowered to 'CCC' from 'CCC+' and the bank's preference share rating was cut to 'CCC-' from 'CCC'.

The downgrade has hit the lender's riskiest bonds the hardest, with its unrated Additional Tier 1 bond trading down two points in the cash market.

Last October, BPE successfully launched a EUR500m perpetual non-call five-year Additional Tier 1 bond with an 11.5% coupon as investors placed orders topping EUR1.5bn in a bet on the Spanish recovery.

Credit analysts have taken a rather positive view on BPE that has spent the past 18 months ramping up its capital base as it prepares for the region-wide health check later this year.

"BPE has improved over the past few years. Like other Spanish banks it provisioned heavily for potential real estate losses after the transparency exercise in 2012," said Lee Tyrrell-Hendry, a credit analyst at RBS.

"The ECB's Asset Quality Review will reinforce these efforts to cleanse its balance sheet, while the recovery in the Spanish economy should slow the rise in bad loans."

The Spanish lender's most senior unsecured bond offering - a EUR750m 4% July 2015 issue - has rallied by over 250bp in the past year to be bid at mid-swaps plus 153bp, according to Tradeweb, and S&P's move has not impacted the issuer's senior or covered bond deals.

BPE certainly looked to be in better shape in December when it said it would restart dividend payments, a move which seemed to mark a comeback for the lender after 14 months spent propping up its capital.

But now BPE's future appears to now be in question as S&P say that despite some decent improvement BPE's liquidity position remains vulnerable to changes in investor sentiment and market conditions in the context of its weakening financial profile.

"....we could lower the ratings on Popular if we anticipate further meaningful asset quality deterioration beyond our current expectations, particularly if this weakened Popular's capital position," S&P added.

Spanish banks are desperately trying to recover from a financial crisis triggered by a 2008 property crash, which left some with gaping capital holes last year after the government enforced writedowns on real estate holdings.

Some had to be bailed out by the state, while others like Popular escaped such aid but had to turn to the market. The bank raised EUR2.5bn in a capital hike in 2012.

BPE was unavailable for comment at the time of writing. (Reporting by Aimee Donnellan; Editing by Helene Durand and Sudip Roy)

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