Oct 22 (The following statement was released by the rating agency)
Bank issuance of subordinated debt and hybrids rose in the first nine-months of 2013 in the
US and Europe, Fitch Ratings says. The increase in subordinated debt issuance is partly due to
banks looking to boost Basel III capital and may also reflect the anticipation of upcoming
senior debt "bail-in" rules.
Junior debt issuance tripled to 13% of 9M13 overall volumes from US financial
institutions and to 12% of EMEA banks issues, compared to 4% on both sides of
the Atlantic a year ago, according to data compiled by Fitch.
The increase comes mainly as banks prepare for revised capital rules under Basel
III, where qualifying subordinated debt counts towards total capital ratio
requirements. In EMEA, some banks have also started issuing contingent
convertible subordinated debt either to meet regulatory requirements (as in
Switzerland) or as part of broader capital management and recovery planning.
Very few of these securities have been additional Tier 1 capital. In the US, the
regulators and banks have preferred to stick to simpler instruments so US banks
have been replacing trust preferred instruments that are subject to regulatory
phase-out with preference shares.
In EMEA, boosting the junior capital buffer for senior debt holders against a
backdrop of progress on EU bank recovery and resolution plans may also
increasingly be a motivation for subordinated debt issuance. Further impetus
may be provided by way of the Financial Stability Board's proposals for
gone-concern loss-absorbing capacity for global systemically important banks,
due to be published by end-2014.
The size of the subordinated debt buffer providing protection for senior
unsecured creditors will be capped by investor appetite for significantly higher
levels of such debt. Banks will also be conscious of optimising the debt mix
from an overall funding cost perspective. Tighter yields for subordinated
relative to senior debt since early 2012 have reduced the cost of junior debt
issuance for banks. For example, the spread between the iTraxx Europe Senior and
Sub Financials five-year indices has narrowed by 175bp since the start of 2012.
This compression and investors' search for yield are likely to have contributed
to the uptick in junior debt issuance.
While banks globally increased issuance of subordinated debt, trends diverged
across the Atlantic for broader market issuance that includes senior and
subordinated debt plus covered bonds. US volumes rose to their highest first
nine-month level since 2008 - reaching USD196bn.
In contrast, EMEA bank issuance was the lowest since before the start of the
global financial crisis - falling 42% from a year earlier to EUR353bn. European
deleveraging and the region's still weak economic backdrop are a drag on many
banks' balance sheets.
More complete data and analysis on bank, as well as corporate, issuance volumes
and ratings trends across the US and EMEA, will be detailed in the third quarter
edition of our reports; "EMEA Corporate Bonds: Rating and Issuance Trends," and
"US Corporate Bond Market: Rating and Issuance Activity," due to be published in
early November. The second quarter editions of these reports are available from