Commentaries
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The EC bank smackdown
Dexia and ING’s recent decisions to call some of their subordinated debt has puzzled market observers, as they seem to fly in the face of the European Commission and its crusade on burden-sharing for banks that have received state aid.
The Commission wants junior creditors of bailed-out banks to share some of the pain along with the public sector, and wants to make sure public funds aren’t used to repay equity or junior debt if a bank can’t. Holders of some of RBS’ subordinated debt recently found this out to their horror when the bank chose not to call the bonds at the first opportunity. The Dexia and ING bondholders, by contrast, will have had a nice pay day. The Dexia upper tier 2 bond was trading below par in the mid 70s area, according to CreditSights.
It looks like the EC wasn’t too pleased with Dexia and ING’s generosity, as last night it issued a stiff press release reminding banks of its rules. That’s not good news for any bondholders who had been hoping that the Dexia and ING calls may have signalled a thawing in the EC’s stance.
Here’s the EC statement:
State aid: Commission recalls rules concerning Tier 1 and Tier 2 capital transactions for banks subject to a restructuring aid investigation
Dash for trash in tier 1
Bondholders seem to be relatively undaunted by the European Commission and its various machinations to ensure bank investors share some of the pain for state bailouts.
Tier 1 debt, the lowest-ranking form of bank capital security, is enjoying a rally this week as investors scramble for higher-yielding securities. Among the chief gainers are bonds sold by Royal Bank of Scotland and Lloyds, both of which have taken state-aid, meaning their bonds are likely candidates for the “burden-sharing’’ the EC is keen to see, such as having to defer coupons or worse.
A dark horse for financial innovation
Financial crises tend to spark innovation, and this one will be no different. Today’s Times of London carries a story on a new security Lloyds Banking Group is devising to raise capital and reduce its participation in the British government’s asset protection scheme (GAPS).
The advantages for Lloyds of raising new capital are obvious: it would reduce the government’s stake in the bank taken as payment for GAPS, give it greater free rein and a more powerful negotiating stance with the European Commission over its restructuring plans.
Retail no answer for bank capital dearth
How does a bank raise capital when institutional investors are steering clear of hybrid debt? The dilemma may be particularly acute for Deutsche Bank, which is still in bad odour with some fund managers for not repaying some subordinated debt at the first opportunity this year as expected.
Deutsche has come up with an answer — bypass the institutional investors and flog some of your capital to the rich man in the street instead. The bank is marketing more than 300 million euros in fixed rate perpetual notes, yielding nearly 10 percent, primarily to retail investors.
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The Wall
