(Adds codes to reach additional subscribers, removes surplus
word in second paragraph)
By Aimee Donnellan and Helene Durand
LONDON, Feb 4 (IFR) - European banks are unlikely to fill
capital holes unearthed by the stress tests with the riskiest
form of hybrid debt, despite being given the green light to do
so by European authorities.
While the European Banking Authority said the impact of
EU-wide stress tests would be assessed on banks' Common Equity
Tier 1, Additional Tier 1 and Tier 2 could play a role in the
stressed scenario, it said last Friday.
"I am not so sure that it will spur a level of activity in
the Additional Tier 1 market," said Sandeep Agarwal, head of
EMEA DCM at Credit Suisse. "I think the stress tests and AQR may
even lead to equity raises first if shortfalls are being
communicated to individual banks."
Under the EBA's requirements, the hurdle rate is 8% Common
Equity Tier 1 for the baseline case and 5.5% for the adverse
scenario. Additional Tier 1 and Tier 2 instruments with triggers
above 5.5% could count in the adverse scenario, the EBA said.
As well as a focus on equity capital raises, however, bank
hybrid issuance is being held back by other factors.
"A number of issuers are still waiting for confirmation from
their regulators about the tax treatment of these instruments,
which is the main factor holding up issuance. Also concerns
around the emerging markets will have to ease before we are
likely to see banks selling CoCos," said Robert Montague, a
senior investment analyst at ECM Asset Management.
Worries over emerging market currencies have led to a
massive sell-off in the wider credit market. That has driven the
cost of insuring subordinated debt up by 26bp to 154bp in
January, according to Tradeweb, spooking issuers and investors
Meanwhile, Alberto Gallo, head of European credit macro
research at RBS said the upcoming leverage ratio and the stress
test would be the driver for issuance. "We expect around
EUR30bn-35bn of supply this year as banks seek to solve for the
leverage ratio," he said
Market participants also criticised the setting of a new
trigger for the instruments, which they said could lead to
Up until now, eurozone banks had believed that the 5.125%
minimum level set out by CRD4 would be enough to satisfy
European regulators, but the new 5.5% trigger has brought
further complications to a market that has failed to come up
with a standard structure for these CoCo instruments.
As a result, bankers and investors now believe that a higher
7% trigger level - as seen on deals for the likes of Barclays or
Credit Agricole - will become the norm. That would benefit
regulators keen for troubled banks to be recapitalised without
the help of taxpayer money.
"It's becoming evident that 7% is the more valuable trigger
than 5.125% as we have seen in the case for UK, Switzerland,
Denmark, or in the case of the recent issue of Credit Agricole,"
said Credit Suisse's Agarwal.
He added that the stress based 5.5% Common Equity Tier 1
ratio hurdle somewhat diminished the value of Additional Tier 1
with a 5.125% trigger.
"Banks will take direction from their local regulator and
there are some that are still trying to gold-plate such
A head of syndicate said that issuers would be tempted to
opt for instruments with a higher trigger, as something with
only 5.5% might indicate that a bank was trying to address its
capital needs solely for the stress tests.
"Also, by opting for 7%, it would allow banks to
future-proof their capital as it's quite clear that there is
still quite a bit of movement," the banker said.
While investors say they have a preference for the lowest
triggers available, they also agree that 7% is likely to become
"I think we are likely to see banks issuing higher trigger
CoCos but second tier Italian and Portuguese banks that need to
raise stress test capital are not in a position to do so because
of the cost and market environment," said a fund manager.
"We are going to get to a stage where bank capital levels
are so high that low trigger CoCos will serve no purpose to a
regulator in a stressed environment," he said.
(Reporting by Aimee Donnellan and Helene Durand, editing by