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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.
RBS’s 7.0916 percent notes have gained 10 percentage points to 51 cents since last week, according to Societe Generale, while equivalent bonds sold by Lloyds have gained 6 points to 55.
Why are they buying? In some cases, bondholders may be hoping for some kind of buyback. Belgian bank KBC, for example, is offering to buy back four subordinated securities at 70 percent of face value. Alternatively they may just be scrambling for yield.
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.
No-one escapes the European Commission
Fitch just delivered some pretty hefty downgrades on subordinated debt sold by Lloyds Banking Group’s insurance arms Clerical Medical and Scottish Widows.Â
The rating cuts follow similar downgrades on debt issued by the group’s banking units last week. Once again, the cause for the downgrades is the European Commission’s renewed zeal for banks that have received state aid to share the pain with their investors, notably by deferring coupons on subordinated debt.
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The seven and eight notch cuts take the bonds from high investment-grade to low-junk (B+). Not pleasant.
Don’t underestimate the European Commission
Will RBS and Lloyds have to follow Northern Rock and defer coupons on their hybrid debt? There’s a nagging fear that any bank that has needed large amounts of state-aid may have to make subordinated bondholders take some of the pain.
Fitch Ratings has just added to the debate with a slew of downgrades of RBS, Lloyds, and six other banks’ subordinated debt, citing an “increased risk of deferral.” The chief threat here is the European Commission, which is getting very keen on the concept of “burden-sharing”, a euphemism for crucifying bondholders.
The rights escape for Lloyds
Talk about hitting the ground running. Even though he doesn’t formally take charge until next month Win Bischoff, chairman-designate of Lloyds, is reported to be pressing for the bank to raise up to 15 billion pounds through a rights issue and to scale back its participation in the government’s Asset Protection Scheme (APS).
His intentions are to be applauded. But regaining some independence will not come cheap for Lloyds shareholders, and substantial government support will still be needed.
from Neil Unmack:
UK mortgage debt: remain calm! All is well!
That's the message given by Moody's today on the resilience of UK mortgage-backed securities to the current downturn. The survey is based on so-called master trusts, a kind of securitization vehicle first applied to U.K. mortgages about a decade ago which quickly became the most efficient way for a large bank to securitize home loans. The master trusts grew so big that they now finance about a fifth of all UK home loans (although a large chunk of this must have been from deals issued by banks after the credit crisis to use as collateral for borrowing with the central banks).
Master trust bonds haven't been immune to the credit crisis. Forced selling by SIVs and funds caused yields on AAA master trust securities to gap out sharply from their low of around a tenth of a percentage point over Libor. Spreads have rallied in recent months, but they are still around 2 percentage points over Libor, largely because many asset managers simply won't touch illiquid asset-backed debt, even if the returns are much higher than equivalent corporate bonds.Â
No early bank exit for Britain
John Kingman has finally stated the obvious. After nine months of near-silence, the civil servant responsible for managing the UK government’s bank shareholdings has piped up to say Britain must be patient in recovering the 35 billion pounds it has so far injected into Royal Bank of Scotland and Lloyds Banking Group.
But Kingman has not gone far enough in stating his objectives. If British taxpayers are to fully recover the sums they have pledged to rescue their banks, they should hold onto their shares for a very long time.
Humbug watch: Lord Levene on “fair pay”
Lord Levene, chairman of Lloyds of London, the insurance market that offers a berth for those who fluff their job interviews at the City investment banks, offered the following sage remarks about pay to the British Bankers’ Association dinner on Monday 29th June:
At Lloyd’s we held a conference a few months back in New York discussing the origins of world wide risk and, in particular, the current problems of the banking industry. Speaking at the conference was one of the most successful and best known investment bankers in New York. One remark he made sticks very much in my memory. He said that when he got his first job on leaving business school at a New York investment bank, he was paid $30,000 per year. At that time, the CEO of the bank was paid $300,000 a year. He thought that that was a sensible multiple. Perhaps we might reflect on the highest paid individuals in some of our institutions and ask whether they are paid more than 10 times the amount of a new joiner. I would leave that thought with you.
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The Wall
