LONDON, Oct 26 (IFR) - Italy’s largest retail bank Intesa Sanpaolo (Baa2/BBB+/A-) sent shock waves through the market on Thursday when it announced that it was changing its call policy on some of its subordinated debt and amending the terms without bondholders’ prior approval.
The announcement came as part of a liability management exercise launched by the bank where it is targeting four Lower Tier 2 notes with an aggregate amount of EUR2.6bn and offering to exchange them into a new euro five-year senior bond.
Increasingly European banks have been signalling to investors that they will not be adhering to previous market practice of calling subordinated deals at the first opportunity for economic or regulatory reasons. Intesa twisted the knife further.
Not only did the bank said it deemed it inappropriate to maintain its call-exercise policy but it also stated that it would change the terms of the bonds targeted in the liability management without prior bondholder consent and remove the call option altogether. This would increase the chances the notes would count as regulatory capital once new global regulatory rules are implemented.
The four issues are callable between November 2012 and June 2013 and include step-ups (which are now effectively step-down) features which disqualifies them as regulatory capital under the new Basel framework.
Intesa’s approach is considered particularly aggressive as it went straight to the trustee to get approval for the outright removal of possible calls. The Trustee however deemed that the removal of the call option was “not materially prejudicial to the interest of the bondholders.”
“Intesa has gone from being perceived as one of the friendliest issuers to being one of the more aggressive,” said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.
“By persuading the trustee to allow them to remove the call option it sets a dangerous precedent that others might follow. Not offering all investors a chance to exit the bonds is particularly harsh.”
Investors in a GBP250m Lower Tier 2 due in November 2017 have been given priority and the offer is an any-and-all offer.
However, Intesa will only spend up to EUR1.5bn out of EUR2.25bn face amount for the reminder of the offer, which could leave some investors potentially wanting to participate left out in the cold holding the bonds until the February, May and June 2018 final maturities.
However, a banker on the deal said on previous similar buy liability management exercises the take-up rates normally ranged between 40% and 60%, so it not clear that those that want out will be unable to do so.
But not only has the call has been removed, the coupon-step feature will still kick in, meaning that the bonds’ coupons will effectively pay less. In the case of the euro, the coupons will move from Euribor plus 25bp, 5.75% and 4.375% - to Euribor plus 85bp, Euribor plus 198bp and Euribor plus 100bp. In other words which equates to 0.98%, 2.11% and 1.13%.
Observing bankers were also quick to criticise the approach which many say is likely to tarnish its image as a particularly friendly issuer.
“I‘m not sure I see the upside in this approach,” said one.
“I‘m surprised the trustee would go down this route without the consent of the bondholders and while legally it seems sound, it sets a fairly dangerous precedent for the market.”
In recent liability management transactions, issuers like BBVA or Raiffeisen Bank International had announced changes to their call policy based on economic and regulatory conditions.
This left a shred of hope that if the market were to improve the issuer would resume calling bonds. However, Intesa has removed any chance of a future call with this announcement.
“This approach has taken everyone by surprise,” said a banker. “Removing the call option is a pretty bold move and definitely goes beyond what we have seen from other borrowers.”
Intesa said the exercise would allow it to optimise both the composition of its regulatory capital through the increase in its Core Tier I Capital, and the cost of funding.
However, Simon Adamson, analyst at CreditSights wrote in a note that Intesa’s argument was weak. “We estimate that even at full take-up the capital gain would only be around EUR95m,” he wrote.
The new five-year senior bond will price at a spread of 310bp, roughly in line with the current market. A seven-year priced by the bank a couple of weeks ago came at 315bp over.
The exchange prices are between 93.5 and 98.5 which Adamson said offered no obvious premium.
Banca IMI, Deutsche Bank, Bank of America Merrill Lynch, Natixis and UBS are handling the exercise. (Reporting by Aimee Donnellan, Helene Durand; editing by Alex Chambers)