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July 24 (Reuters) - (The following statement was released by the rating agency)
EMEA bank issuance of subordinated and hybrid debt in 1H14 jumped sharply to new highs as plans addressing too-big-to-fail put junior debt buffers back on the agenda, particularly for larger European institutions, Fitch Ratings says. But regulatory uncertainty, for example on the use of additional Tier 1 (AT1) instruments in leverage ratios or junior debt’s longer-term role within stress testing frameworks, may slow further growth.
Junior debt issuance jumped to 19% of 1H14 overall volumes from EMEA banks, from 7% a year earlier, according to data compiled by Fitch. Building a junior capital cushion to protect senior debt holders from bail-in under EU bank recovery and resolution plans is likely to be a motivating factor for some banks. The rise in subordinated debt issuance is also partly due to banks refinancing legacy securities to boost Basel III capital.
The rise in Basel III junior debt volumes was notable in the European high-yield market, where issuance of non-investment grade debt from developed market banks increased over six-fold yoy to represent 37% of total European high-yield issuance in 1H14. This helped push European high-yield issuance to record highs of EUR112bn.
Increasingly European banks are issuing AT1. This follows the confirmation of the tax treatment in a number of countries including the UK, Italy and Germany, after the finalisation of Basel III rules in the EU under the Capital Requirements Directive IV (CRDIV). The Financial Stability Board’s proposals for gone-concern loss-absorbing capacity for global systemically important banks due at the November Brisbane summit may provide further incentive for junior debt issuance.
However, any limitation on the use of AT1 in the leverage ratio, for example, could constrain the expansion of the market. This is a restriction being considered in the UK.
A trend towards higher trigger points, for example an 8% trigger is being discussed in Sweden, would reduce the cost effectiveness of the securities. The ECB is also incentivising higher-trigger AT1s at eurozone banks with caps on the use of AT1s to fill capital shortfalls under the adverse scenario in this year’s stress test, depending on the trigger level. Minimum qualification starts at 5.5% (so above the 5.125% minimum stipulated in CRDIV), with the least stringent restrictions applied to instruments with triggers at or above 7%.
Overall, EMEA financials boosted issuance by 33% in 1H14, following 18 months of decline. This represents a EUR71bn rise on 1H13, with growth in junior debt issuance accounting for two-thirds of the rise. Senior unsecured issuance was also strong, but covered bond volumes fell 11%, with a drop in Spain being the largest driver.
More complete data and analysis on bank, as well as corporate, issuance volumes and ratings trends across EMEA, will be detailed in the third quarter edition of our reports; “EMEA Corporate Bonds: Rating and Issuance Trends,” to be published in August. The first quarter edition of the report is available from www.fitchratings.com.