Commentaries

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The EC bank smackdown

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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

Four Seasons debt odyssey – still one more year to go

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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.

RBS issue must be on commercial terms

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Britain’s state-controlled banks appear to be playing a game of tit-for-tat. Lloyds Banking Group last week admitted it was looking for ways to reduce its exposure to the government’s insurance scheme for toxic assets. Now it turns out that Royal Bank of Scotland is also sounding out investors about tweaking its own involvement in the scheme.

That is where the similarities end, however. RBS is being much less ambitious than Lloyds. It still wants the government to insure all of the assets it agreed to put into the scheme in the winter. It just wants to pay some of the premium in cash rather than its own equity. This may look a superficially attractive way to de-risk the tax-payer’s huge exposure to bank equity, but the government should think hard before accepting.

Dash for trash in tier 1

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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.

The European Commission strikes back

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Reeling from the humiliation of failing to stop Belgian bank KBC paying interest on some of its subordinated bonds, the European Commission has won a new victory in its bid to see bondholders share the pain of bank bailouts.

Acting as a sort-of policeman for Brussels, the UK’s Financial Services Authority has prevented the Royal Bank of Scotland from repaying four subordinated bonds at their first opportunity, causing prices to plunge by up to 15 percent. The Upper Tier 2 euro-denominated bonds fell to between 70 and 75 cents, depending on who you ask.

Don’t underestimate the European Commission

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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.

Are Lloyds shares cheap? Not as cheap as this funny money

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Shares in Lloyds Banking Group are worth 150 pence apiece, according to the analysts from Royal Bank of Scotland, who think the shares offer “a compelling restructuring opportunity” around today’s 95 pence.

Lloyds, say the brokers, is going to recover sufficiently to pay a nominal dividend next year, and something quite substantial in 2011, thanks to margin expansion, cost control and normalising bad debts.

Why is RBS’s boss selling its shares?

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Controversy and running RBS go hand in hand. Stephen Hester replaced Fred Goodwin as chief executive of RBS and is now in hot water himself over his incentive pay deal. The chief executive of the state-controlled bank could be paid 9.6 million pounds over three years if the share price (currently 44p) reaches 70p. However, he seems to have so little faith in the shares reaching that level that he has offloaded 1,264,565 shares since last November at prices between 28.5p and 48p, yielding just over 464,000 pounds.

When  unveiling first half results last week Hester asserted that “We have a strong plan in place that I believe can get us to where we need to be by 2013,” which presumably includes recovery in a share price still languishing more than 90 percent off its peak.

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. 

You are not a loan, RBS ads remind customers

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RBS/REPOSSESSIONIs the Royal Bank of Scotland softening up the public and politicians ahead of its results on Aug 7th with a series of newspaper advertisements telling us how many loans it is dishing out?

The 70-percent state-owned bank is expected to post a pre-tax profit of 1.2 billion pounds for the first half of the year, according to a Reuters poll of analyst forecasts. 

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