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European Commission defanged by hybrid debt

Fans of the weird and wonderful world of hybrid debt will have enjoyed the European Commission’s U-turn with Belgian bank KBC.

The EC wants banks that have benefitted from state aid to “burden share’’ with private sector investors by deferring optional coupons on their subordinated bonds. That sounds simple enough — after all the essence of subordinated debt is that it can defer interest without counting as a default. Burden sharing, whether imposed by the EC or not, is what hybrid debt is all about.

However, after saying that KBC should defer coupons on certain securities the EC has now backtracked because the Belgian bank and third party lawyers were able to pick through the docs and argue that the coupons weren’t optional after all. 

It looks like the EC is going to need to do some hardcore analysis of its own to work out exactly which coupons can be legally deferred. Perhaps it will conclude there are easier ways to `burden share’.

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.

Calling a bottom in Spain

Is the worst over for Spanish mortgage defaults? That’s one way to interpret Santander’s offer to buy back up to 16.5 billion euros of its outstanding asset-backed debt.

The securities are trading below par – more than 40 percent in some cases before today’s announcement – allowing the bank to reduce debt by buying them back. Cash-rich banks such as HSBC have launched similar buybacks this year to profit from the ABS market dislocation, but it’s the first time a Spanish bank has launched such a large public buyback.

Reality arrives at The Rock

The surprising thing about Northern Rock’s decision to defer coupons on 1.6 billion pounds of its subordinated debt is the timing — arguably, it’s a miracle investors were getting paid anything at all.

The bank on Tuesday said it would stop paying coupons on various subordinated bank bonds, securities that count as regulatory capital.

Cash M&A still lifeless

Bond sales are at a record, equity markets are at year-highs, private equity firms are sitting on huge cash piles — Blackstone alone has $29 billion — and banks are lending to each other again.

The ingredients should all be there for a resurgence of cash-driven mergers and acquisitions. But instead, the market is in hibernation.

from Neil Unmack:

Bond investors won’t bail out private equity

Private equity and European high-yield bond investors have an awkward relationship. Investors recoiled from the market after telecom companies went bust in the dot-com crash. Issuance picked up during the recent credit boom, but PE firms raised most of their funding through private bank loans, many of which were repackaged into collateralised loan obligations (CLOs).

Now that banks won't lend and the CLO machine is broken, financial sponsors need to find a way of refinancing the hundreds of billions of euros of loans that will come due over the next five years (S&P estimates over 500 by the end of 2015).

Stomachs of steel for U.S. debt

Bond market vigilantes — investors who punish profligate governments by pushing up their cost of borrowing — have been remarkably quiescent.

This week the U.S. government has broken all records for debt sales. Come Friday investors will have bought $115 billion of freshly minted Treasury paper, and given the huge scale of these auctions, investors have shown only modest signs of indigestion.

from Neil Unmack:

Accountants to the rescue

Moody's has published some interesting research on how European companies’ pension deficits have emerged from the last few months of financial mayhem, and the impact of accounting practices on calculating their current deficits.
Top of the list for investment nous comes Rolls Royce, whose pension assets gained eight percent in 2008 after the company reduced exposure to equities in 2007. Bottom of Moody’s 20-strong sample was Shell, whose pension assets tumbled 29 percent, according to the rating company's estimates. The average decline was 14 percent.
This decline means that European companies’ pension obligations are on average 93 percent funded -- more or less in line with the agency’s forecasts, and far ahead of their U.S. counterparts.
But let’s not get too jubilant just yet.
Moody’s notes that the results have been boosted by accounting rules that allow European companies to discount their pension obligations at a rate derived from high-quality corporate bond spreads—very handy given the spike in yields last year. This crops up as an actuarial gain in the pension footnote.
One European company booked a reduction in its pension deficit of between 15 and 20 percent as a result of actuarial gains, Moody’s notes, while 14 of the 20-strong sample booked reductions of 5 percent or more. (Actuarial gains, of course, aren’t limited to changes in the discount rate, Moody’s stresses). 
Nonetheless, the concern is that falling real bond yields, if not matched by rising asset prices, will cause companies' pension funding levels to fall further—forcing them to record larger deficits and stump up more cash.

Food, art, life, death, bonds

As co-chief investment officer of PIMCO, the world’s largest bond fund, Bill Gross is certainly “one of the nation’s most influential financiers,” as a recent New York Times profile noted. Not surprisingly, his monthly message to investors is widely read.

Investors will be curious about his views, but Gross’ missives should also be read for their entertainment value. His writing has a flamboyance rarely found in typically dry, jargon-jammed investment newsletters. In June, he started off by named-checking Balzac and F. Scott Fitzgerald.

from Neil Collins:

A haircut or a headcut for GM bondholders?

Bill Zastrow owns $240,000 of General Motors bonds. He's not happy, but, as he told Reuters' Kevin Krolicki, "We were getting the Marie Antoinette haircut and now it looks like it's a few inches higher."

The best guess is that his holding is now worth about $22,000, not far away from the sum he used to get in annual interest, but that's better than the zero-to-$12,000 which the earlier offer to bondholders implied.

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