February 12, 2013 / 3:41 PM / in 5 years

Banco de Valencia sub debt burn triggers 2015 bail-in fears

LONDON, Feb 12 (IFR) - Junior bondholders have been dealt yet another blow this week as Spain’s Banco de Valencia is poised to write off as much as 90% of the value of its subordinated debt in a bid to restructure without having to rely on public aid.

The near wipeout in the instruments follows hot on the heels of the nationalisation of Dutch Bank SNS Reaal late last month and a shock decision to leave junior bondholders with nothing at all.

Though not as aggressive as SNS, Valencia will leave bondholders with just 10%-15% of their original investment.

Compatriot Bankia, meanwhile, is in the process of thrashing out a similarly aggressive restructuring that could leave investors, including retail accounts, with equity rather than cash in the failed bank.

Bankers say the bold move by regulators could now extend to senior bondholders, who so far - except for those in Denmark - have been left untouched in European bank restructurings.

“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 a London-based hybrid capital banker, referring to EU plans to impose losses on senior bondholders.


Banco de Valencia was one of four Spanish banks bailed out by the state during the financial crisis, alongside Bankia, CatalunyaCaixa and NovaGaliciaBank (NGB).

Some sold preference shares - which sit near the back of the queue and count as Tier 2 capital in the event of default - to retail investors in order to increase solvency ratios. Tier 2 investors rank below senior bondholders.

The buffer that Tier 2 debt provides against potential losses has given investors more comfort in senior unsecured bank paper, allowing issuers to sell bonds with maturities that exceed the targeted 2018 date for bail-ins.

The differential between the Senior and Subordinated iTraxx indices widened to around 116bp in the wake of SNS Reaal’s nationalisation, and has so far stuck around those levels.

More aggressive rhetoric from some politicians last week about making senior bondholders share the pain in future bailouts could see senior spreads widen out and the cost of issuing such debt rise.

Last week, Germany, the Netherlands and Finland called for senior bail-in plans to be expedited to 2015.

The Dutch Finance Minister, Jeroen Dijsselbloem, considered including senior bondholders in the SNS expropriation, but backed off, fearing an unfavourable market reaction.

“Theoretically, even more creditors of SNS Reaal and SNS Bank might have been expropriated, that is, creditors on an equal footing with depositors: the ordinary creditors,” he said in a letter to parliament explaining the move.

“This includes uncovered bank bonds, also known as ‘senior bonds’. This option was dropped, however, because of expected adverse effects on financial stability.”

Up until recently, investors would have been forgiven for thinking their money was safer in the hands of a peripheral bank like Valencia with a wary regulator that is more likely to leave investors with something rather than nothing.

Peripheral countries had shown themselves to be terrified of contagion. When Anglo Irish was nationalised back in January 2009, subordinated bondholders were written down to 20% a year and a half later as part of a tender offer designed to avoid hurting sentiment in the country’s stronger banks. And senior bondholders were left untouched.

But the tide seems to be changing for peripheral banks that are taking aggressive action to avoid going cap in hand to their taxpayers. (Reporting by Aimee Donnellan, additional reporting by Sonya Dowsett; Editing by Natalie Harrison and Julian Baker)

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