* Private banks reduce leverage for bank hybrids
* Fears of fallout in case write-downs are triggered
* Clients turn to corporate perpetuals instead
By Christopher Langner
SINGAPORE, Sept 20 (IFR) - Tougher lending policies are
threatening to drive Asia's private-banking clients away from
bank capital and towards corporate hybrids.
Private bankers said they are reducing the margin loans, or
leverage, they make available to buyers of loss-absorbing
capital instruments that expose investors to the risk of
permanent principal losses.
"They are seeing that some of these bonds will trade to zero
if the loss-absorbing features are triggered," said one
fixed-income specialist at a private bank. "If my collateral may
be completely gone, I will give zero leverage, as well."
To count towards a bank's capital adequacy ratio under Basel
III rules, securities must write down to zero or convert to
equity in case the bank's capital falls below a certain
threshold. Corporate issuers, however, have no such
requirements, and new leverage policies may lead to a resurgence
of corporate hybrids in Asia.
Wealthy Asian individuals have been among the most
enthusiastic buyers of bank capital in recent years, but there
are signs that the new loss-absorbing requirements and tougher
margin limits are eroding that investor base.
Reduced appetite for bank capital bonds may make it more
expensive for financial institutions to meet capital adequacy
rules, adding to the pressure on earnings in the sector.
On August 29, Societe Generale was able to sell only 9% of
its US$1.25bn Tier 1 bond in Asia, despite offering a relatively
high coupon of 8.25%.
That was in sharp contrast to UBS selling 70% of a US$2bn
Tier 2 capital bond to private banking clients, many of them in
Asia, in February 2012.
The UBS bonds featured a total write-down if the bank's
common equity Tier 1 capital falls below 5% or it is considered
non-viable. At the time, Asian private banking accounts paid
little attention to that risk, focusing instead on the 7.25%
coupon and the well-known Swiss name.
The deal sparked a trend and Asian private banks became the
first stop on any bank capital deal for most of 2012. In fact,
bankers said, of the Basel III-compliant bonds European banks
printed last year, two-thirds to three-quarters were allocated
to Asian accounts, mostly private banks.
HYBRIDS IN DEMAND
Societe Generale's reduced Asian allocation is also a big
contrast to other recent hybrids that come without the risk of
On September 9, Japan's Fukoku Mutual Life Insurance sold a
US$500m 6.5% perpetual bond callable after 10 years. As much as
60% of those bonds ended up in Asian hands, while 45% of the lot
went to private banks.
After the Reg S-only issue, a 144A/Reg S 60-year non-call 10
hybrid from Sumitomo Life Insurance followed the next day, also
pricing at 6.5% and heavily bought by private banks.
Both bonds had investment-grade ratings of Baa1 from Moody's
and leverage was said to be readily available from private
banks. Neither had write-down clauses.
The depth of Asian demand for those hybrids has led to
predictions that corporate hybrids may soon reappear elsewhere
in Asia. The obvious candidates to reopen the market are the
blue chips of the region.
"If the corporate hybrid is structured appropriately, there
will be plenty of demand for it, and not only from private
banking," said a high-yield portfolio manager.
Even where leverage is still available for bank-capital
securities, private banks are taking additional steps to make
sure clients know what they are buying.
One private banker said his shop had capped leverage on bank
capital bonds to 30% recently, partly because of fears of
potential downgrades of such paper. Another said many private
banking clients had declined to take up the margin loans on
The reason, he explained, was that end-investors were being
told very clearly of the risks involved in buying bank-capital
"Private bankers have started to worry about potential
lawsuits," said the first banker.
Several wealthy Asian investors sued their financial
advisers in the aftermath of the 2008 global financial crisis
for giving them bad advice on potential losses from some of
As a result, some private banking clients are being asked to
sign forms indicating they understand the risks involved in
these bonds, commonly referred to in the financial world as
"The chances that the capital bonds of some of the best
banks in Asia are written-off are small, but, if that happens,
everyone wants to be safe," he said.