* Market recovers following SNS sub debt wipeout
* Weak banks to suffer as investors ramp up credit analysis
* HSH Nordbank, MPS, Bankia and Commerzbank come into focus
By Aimee Donnellan
LONDON, Feb 15 (IFR) - The potential acceleration of senior
bank bail-ins and increasingly aggressive treatment of
subordinated bondholders in distressed banks have focused
investor minds, but despite a knee-jerk widening few expect a
broad repricing of financial debt.
Junior bondholders have been dealt a number of blows over
the past three weeks. After the Dutch government's shock
decision to nationalise SNS Reaal and write subordinated bonds
down to nothing, investors in Spain's Banco de Valencia were hit
by a similar move.
The troubled Spanish lender this week said it would write
off as much as 90% of the value of its subordinated debt in a
bid to restructure without relying on public aid.
And in a similar vein, compatriot Bankia is thrashing out an
equally aggressive restructuring that could leave investors,
including retail accounts, with equity in the failed bank.
The market reaction to the Spanish announcements has been
surprisingly muted. Following the nationalisation of SNS, the
gap between the Senior and Subordinated iTraxx indices widened
to around 116bp, but has since come back in to less than 100bp.
It is clear that SNS gave investors a fright, but that is
likely to lead to a more selective approach to credit analysis
rather than an all-out retreat from the FIG market.
"Investors need to distinguish between banks that can raise
private sector capital if needed, and those that will struggle
should they need a capital injection in 12-18 months time," said
Satish Pulle, a portfolio manager at ECM.
Bondholders had taken for granted regulatory forbearance in
bank restructurings. But those days are clearly over.
"The Dutch regulator's action on SNS has now set a precedent
that is likely to be followed by others," said a London-based
"This is not only a wake-up call for institutional investors
but for retail accounts that are exposed to a number of
restructured Spanish banks."
Bankers are now warning that the bold move by regulators
could extend to senior bondholders, who so far - except for
those in Denmark - have been left untouched in European bank
"It feels like regulators are getting more aggressive, even
in the periphery, and for that reason I think we're likely to
see the bail-in brought forward to 2015 rather than 2018," said
another London-based hybrid capital banker, referring to EU
plans to impose losses on senior bondholders.
Issuers are confident that investors are already adapting
and are unlikely to retreat from the FIG market altogether.
"The market has recovered for decent credits," said Waleed
El-Amir, senior vice-president of UniCredit's strategic funding
and investments business.
"I'm sceptical that senior bondholders will be bailed in
ahead of the 2018 deadline because almost all of the regulatory
proposals have been delayed. However, events like the
nationalisation of SNS are likely to increase the funding costs
of weaker banks (and) that will now be in focus."
Bankers say investors holding paper in loss-making banks
such as HSH Nordbank, MPS, Bankia and even Commerzbank risk
potential write-downs by regulators.
This does not necessarily mean an across-the-board hike in
banks' borrowing costs, bankers say.
"Senior bail-in will happen when there is EU-wide regulation
but I don't think it'll be an issue for investors - it's just a
matter of pricing your risk," said Oliver Gazzolo, global head
of credit trading at Societe Generale.
"We've already seen the FIG market mature and a definitive
and clear regulation will help investors to deal with these
Indeed, the FIG market has a number of precedents of a
knee-jerk reaction to credit events causing bank spreads to
widen, only for the market to stabilise and recover following
investor acceptance of heightened risk.
Last year, a legislative draft published by the European
Commission proposed that senior debtholders be able to take
losses from 2018 onwards, but the ramifications have been
"Issuers have already been selling senior debt beyond 2018
which means that for the last few years of these deals they
could be subject to bail-in if the bail-in regime is implemented
as currently proposed," said Gerald Podobnik, head of capital
solutions at Deutsche Bank.
"This hasn't stopped banks from being able to sell
long-dated senior debt."
(Reporting by Aimee Donnellan; Additional reporting Christopher
Whittall; Editing by Alex Chambers & Julian Baker)