Regulator blocks Royal Bank of Scotland payout of subordinated bonds
By Jane Baird and Jane Merriman
LONDON, Sept 4 (Reuters) – Royal Bank of Scotland will not exercise options to redeem more than $1.5 billion of subordinated debt next month after regulators objected to it using state aid to repay the low-ranked bondholders.
Royal Bank, 70 percent owned by Britain, also said on Friday that future decisions on whether or not to redeem bonds would also be subject to approval from the Financial Services Authority, Britain’s finance sector watchdog.
The move showed regulators and policymakers are trying to ensure investors bear some of the cost of bailing out troubled banks that has fallen so heavily on taxpayers.
The FSA decision was taken in consultation with the European Commission which has said that, where possible, banks receiving government cash should not use for payments to investors.
ING credit analysts said in a note to investors a sell-off of Lower Tier 2, or subordinated, bonds issued by banks which have submitted a restructuring plan was likely.
“Although it is the Financial Services Authority which officially objects to these calls (repayments), the decision has been taken in consultation with the European Commission,” ING said in a note to investors.
Five-year credit default swaps on Royal Bank of Scotland’s subordinated debt widened around 20 basis points to 325 basis points, a trader said.
Five-year CDS on RBS senior debt widened around 6 basis points to 131.50 basis points, according to Markit data.
The Markit iTraxx five-year subordinated financials index was 2 basis points wider at 177 basis points, the trader said. The index widened by more than 5 basis points soon after the RBS announcement.
“Given the price reaction to the news it’s clearly caught the market by surprise,” said Ben Bennett, credit strategist at Legal & General.
Prices of Royal Bank Lower Tier 2 bonds similar to those affected fell about 7 points to around 88 percent, one analyst said.
RBS shares were up 0.6 percent at 1350 GMT.
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“The concern is could other UK banks be forced to follow suit by the regulator,” credit strategists at BNP Paribas said. “However, the general feeling is that the reaction could mellow out as these are in fact relatively small issues.”
RBS’s four bonds are two Upper Tier 2 notes for 400 million euros ($571 million) and 100 million euros, and two Lower Tier 2 notes for A$590 million ($496 million) and A$410 million.
The EC’s attempts to spread the burden of bank bailouts to shareholders and holders of higher-risk subordinated bank debt has had mixed results.
The Commission ruled last year that Germany’s BayernLB could not pay out any interest on a Tier 1 bond, which ranks just above equity, as a condition for approving billions of euros in state aid.
The EC also told Anglo Irish Bank recently not to pay interest on Tier 1 bonds.
In August, Belgian bancassurer KBC said it would not pay interest on a Tier 1 bond pending regulatory approval of a restructuring plan and after discussions with the European Commission.
But earlier this week, the Belgian bank said it would pay coupons after all on certain outstanding Tier 1 bonds, reversing its earlier move and highlighting the difficulty of imposing a blanket ban on such coupon payments.