The Great Debate UK
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.
Santander has offered to pay slightly more than market prices, suggesting it thinks there is some money to be made by buying these bonds at beaten-up prices and waiting for the mortgages to pay off.
The buyback could also be a sign Santander believes the freeze in the European securitized debt markets is thawing.
Investors like simple narratives, which is why markets swing erratically and illogically between extremes of hope and fear. Reality is more complex. As F. Scott Fitzgerald remarked “the true test of a first-rate mind is the ability to hold two contradictory ideas at the same time”.
Three months is a long time in the markets, and particularly for banks. Alongside the rally in bank shares, investors have also bid up bank bonds, especially so-called tier 1 bonds which rank just above the equity in the list of creditors.
- Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. -
Is the crisis over yet?
In the last 3 months, the Dow and the FTSE have each risen by about 25 percent, the Standard & Poor’s 500 by a third. House prices appear to be stabilising in the UK. Stress-tested and backed by seemingly unlimited government funding, the banks are lending again (if only to each other), so that 1-month libor is down to only 0.3 percent.
Ineos Group, popularly described as Britain’s largest private company, has escaped the hangman’s noose again. For the second time, a sufficient majority of the 230 banks to which it owes 7.5 billion euros have granted it a stay of execution.
When the going got tough, banks were quick to bring down the shutters and cut off loans to European companies, forcing them to seek other sources of funding. The result — a dramatic shift to the bond markets, where corporates borrow directly from investors.
This failure of the banks to be there when borrowers needed them most could spell the end of the European syndicated loan market as the powerhouse of corporate finance activity in the region, marking a longer-term shift in the funding mix for European companies from loans to bonds.
By Neil Collins
LONDON, April 9 (Reuters) – Is Hugh Osmond having a laugh?
The answer is obviously yes, except that Osmond doesn’t do jokes, and if he can persuade the banks that have lent to his leveraged insurance vehicle, Pearl, with his reconstruction arithmetic, he’s the one who will end up with the biggest grin.
He’s talking of floating shares in the disparate collection of closed life assurance companies he put together only last year, because “the debt funded acquisition model that served Pearl and others so well in the past is no longer appropriate.”
It may have served him well, but the holders of a 500 million pound ($736.5 million) sterling eurobond, issued by a company that is now a Pearl subsidiary, are not laughing.
Rather, they are spitting tacks after Osmond said last month that he wasn’t going to pay the coupon on the bond, even though he had the money.
The price, already weak in anticipation of bad news, has collapsed to 5 pence in the pound bid, 10 pence offered.
The holders have formed themselves into an action group, and forced Pearl to agree to meet them next month.
Legally, they are on weak ground, since the deed allows payment to be deferred, but if Osmond is serious about flotation, their position looks much better.
The holders range across the usual spectrum of UK life offices and pension funds, who would be the natural buyers in the share issue.
There is more at stake here than the loss of 90% of the bond’s value. If Osmond can effectively turn this issue into a perpetual zero-coupon bond, plenty of others will try to do the same in this $100 billion market.
Where the bondholders’ lawyers look likely to fail, institutional pressure may well force better behaviour – assuming Osmond really is serious about coming back to market.
(Editing by Timothy Heritage)