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

Consumers still have a lot of wood to chop

What with unemployment climbing, housing as well as equities still well below their peaks and general anxiety about when the economy is going to rebound, it’s good news that consumers are cutting back on credit after binging for years. But Josh Shapiro, economist at MFR Inc, is not impressed.

Since the peak in July 2008, consumer credit outstanding has fallen by $119 billion as households struggle to get their balance sheets in order after asset prices melted down. To put matters into perspective, the Federal Reserve reports that as of the end of Q2, the value of household net worth had plunged by $11 trillion from its peak in Q3 2007 (a staggering sum, equal to almost 80% of nominal GDP). So, while representing a good start, the deleveraging that the household sector has accomplished to date is just that, a start.

The EC bank debt riddle

The European Commission seems to enjoy messing with bankers’ and investors’ heads in its crusade against subordinated bank debt.

Earlier this year the EC roiled markets by insisting holders of bank subordinated debt securities should suffer along with the taxpayer for bailouts. It stopped RBS from calling some tier 2 bonds, and also cracked down on KBC.

Four Seasons debt odyssey – still one more year to go

Four Seasons Healthcare, the UK care home operator, has finally completed its 1.5 billion pound debt restructuring, after a year of creditor wrangling. The group has ended up in the lap of lenders including RBS, which owns about about 40 percent of the company.

Now it has to set about refinancing 600 million pounds of asset-backed debt due next September, which makes up the bulk of its remaining 780 million pound debt pile. If the company can pull it off it will be extra good news for RBS, which managed to negotiate a deal giving it an extra slug of equity (just over two percent) in exchange for advisory services, based on performance.

Bond market not convinced by M&A boom

Investment bankers shouldn’t pin their hopes on a surge in mergers and acquisitions activity. That’s the message from the bond market in a recent survey by Bank of America Merrill Lynch.

Acquisitions can hurt bondholders because companies often take on debt when buying rivals, lowering their credit quality.

Good hybrid crack

It’s interesting to see the Irish government seems to have been keeping a close eye on the hybrid debt fiasco, as it is now embracing the securities as a way to ensure the country’s banks don’t get an easy ride offloading dud property loans to NAMA, its bad bank scheme. I guess you could call it a form of payback.

Hybrid debt has played its own special role in creating the current mess.
Banks used hybrid debt to bolster their capital ratios even though the securities weren’t always very good at absorbing losses.

Anyone for cov-lite?

In our post-credit crunch era of avowed simplicity and rigorous credit analysis, you’d have thought that bond investors would be demanding tougher terms than ever to finance high yield companies.

Not at all, according to recent research by Moody’s on the growing European high yield bond market, where deal structures are looking rather toppy. 

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.

Bernanke: Back to Clark Kent

Having averted a disaster, cartoon superheroes typically revert to their bland civilian identities. With the recession loosening its grip, Ben Bernanke is trying a similar trick.

After a period of heroic boldness and creativity, the Fed is determined to be dull. Wednesday’s statement from the Federal Open Market Committee may well be calculated to bore.

Kingman to go private

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John KingmanSo John Kingman is leaving UK Financial Investments “in due course” to spend more time with the private sector. That, at least, is the line put out by Robert Peston, the BBC reporter who could sometimes be confused for his personal press officer, on his blog.

As Pesto observes:

He’s wanted to move into the private sector for a couple of years – and said as much to the Treasury’s permanent secretary, Nick Macpherson, last summer.

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