Erste gets set for Additional Tier 1 issuance despite HAA spectre

Thu Jun 26, 2014 8:28am EDT

LONDON, June 26 (IFR) - Austrian lender Erste Bank has set up a 2bn Additional Tier 1 programme as it looks to join the fray of European banks that have used these instruments to bolster their capital bases and leverage ratios.

However, unlike other European banks which have had a relatively clear path to that market, Erste will have to contend with the Hypo Alpe-Adria saga and resulting negative rating action on the country's banking sector.

Earlier this month, the Austrian government put forward a legislative proposal that would allow it to bail-in subordinated debt holders in HAA even though the debt is guaranteed by Carinthia.

As result, S&P put seven Austrian bank ratings on CreditWatch negative, including Erste Bank's single A rating. Moody's took a step further on June 20, and downgraded by one notch the senior long-term debt and deposit ratings of 11 banks, sending Erste's rating to Baa3.

"The unprecedented nature of the government's decision to declare a statutory guarantee issued by a public body null and void leads Moody's to believe that Austrian authorities are now generally more willing to consider bank-resolution scenarios in which losses may also be imposed on senior creditors," the agency wrote.

And if that was not enough, the banks are also heavily exposed to risk in Ukraine and Central and Eastern Europe.

"RBI, Erste Bank and Bank Austria (a subsidiary of UniCredit) have together lent around 200bn to CEE borrowers, or 40% of their total lending," RBS analysts wrote in a recent note.

"Around 16% of RBI's loans are to Ukrainian or Russian borrowers. These CEE loans are now turning bad, with NPLs currently at 12% is rising by 1-2pp per year. We remain underweight Austrian banks including Erste Bank, RBI and UniCredit (with exposure through its subsidiary Bank Austria)."

NO RUSH

An official at Erste Bank said it was not in a rush to issue.

"We have set up the programme and we will issue when we feel comfortable with the market," the banker said, adding that Austrian banks now had full clarity on the tax treatment of the instruments - which is aligned with other European countries and thus favourable.

Erste has three outstanding Tier 1 issues, according to the banker, and has already skipped calls on two of them. The third is callable for the first time in September 2016.

Erste Bank's 500m 7.125% 2022 Tier 2 has widened by 15bp since hitting mid-swaps plus 251bp on June 12, according to Tradeweb prices.

Erste will use a similar loss-absorption structure to the one adopted by other continental European banks: a temporary write-down/write-up.

The Tier 1 capital ratio trigger, where bonds would have to absorb losses, has not been set, however, and is flexible, although the minimum as defined by EU regulation is 5.125%.

Erste posted a Common Equity Tier 1 capital ratio of 11.1% of risk-weighted assets at the end of the first quarter.

Barclays arranged the programme, while Barclays and Erste are the dealers, although other lead managers would be appointed for a new trade, Erste said. (Reporting by Helene Durand, Editing by Alex Chambers, Julian Baker)

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