LONDON, Nov 23 (IFR) - Investors in eurozone bank debt, badly bruised by unexpected resolutions of some such lenders in recent months, are being forced to take a more realistic approach to their strategies in the wake of these events.
On June 7 the European Union’s Single Resolution Board took the decision to resolve Banco Popular after a sudden outflow of corporate deposits from the Spanish bank. This saw the bank’s junior debt converted to equity before it was sold for a token €1 to Santander.
“The price of Popular’s AT1s [Additional Tier 1 bonds] went from 70 cents [in the euro] to zero. Lessons need to be learned from this about the severity of the resolution and the decision of the SRB,” said Gildas Surry, partner at financial fund manager Axiom, at a conference organised by IFR this week.
“Given the speed of the resolution after deposits left the bank, investors need to get more details on corporate deposits and particularly those of state-owned entities. You need to analyse a bank’s liabilities, such as its deposits, as much as its assets,” he said.
Another investor speaking at the conference said the SRB’s decision regarding Popular, which contrasted with the more lenient approach taken towards Italy’s Banca de Veneto and Vicenza, showed that investors still need to take political factors into account.
“A very elaborate framework has been developed since the crisis regarding resolution and different types of debt. But it remains the case this will only work in an ideal world,” said Georg Grodzki, chief investment officer at Bohler Asset Management.
“There will always be political decisions in this area to protect domestic retail depositors rather than overseas institutions, which are susceptible to receiving different treatment.”
The SRB, which reached the decision to resolve Popular in conjunction with the European Central Bank, European Commission and the Spanish authorities, including the local bank resolution fund FROB and the Bank of Spain, was criticised by investors who have lodged legal complaints about the action.
“This was not a textbook resolution. To be honest it was a travesty,” said Davide Serra, chief executive of Algebris, one of the institutions suing the SRB. “I am super happy that Santander made the best deal in history, as I am a big holder of their paper. But we have the firepower to fight the decision.”
“If the SRB and the system had worked as it should, then the €2bn of contingent capital should have been converted into equity. This was a classic test-case of capital as a going concern. If that had then failed the bank could have failed.
“Instead the SRB itself has no capital and no backstop, which is a tragedy. So to prove themselves they have stolen money from investors. To call it a textbook resolution as a European citizen and taxpayer that really annoys me. It pisses me off.”
The investors, which include Ronit Capital and Anchorage Capital as well as larger institutions, have requested the publication of a valuation report on Popular, provided by Deloitte ahead of the resolution, to see why that led to the SRB’s decision.
“Investors should have been included in discussions and not just have been told what was decided by the resolution authorities,” said Matthieu Loriferne, executive vice president at Pimco. “It’s important that they are consulted as happened for instance in Co-op Bank.”
In the latter situation, which also took place in June, bondholders agreed to swap their positions for equity in the UK lender.
“People should be wary of regulators. We have no recourse where we can hold authorities to account,” said Grodzki.
“Investors have helped by providing contingent capital when banks were unable to raise equity but we don’t have any voting rights at AGMs or equity upside. So people are shafted when a Spanish bank is restructured. There will be more legal challenges to decisions.”
This week some bondholders in Banca Monte dei Paschi di Siena have filed such a complaint against the decisions taken to rescue the Italian institution. (Reporting by Christopher Spink)