The world’s top firms will struggle to inspire the “millennial” generation with a reward culture based on endless hours in the office and networking built around heavy drinking and macho sports, according to business professor Elisabeth Kelan.

The senior lecturer at King’s College London argues in her new book “Rising Stars” that 21st century graduates of both genders aren’t willing to devote themselves entirely to any one firm in a world where changing jobs every two or three years is the norm.

“The millennial generation – both men and women – don’t want to live their entire life to work,” Kelan said.

“This is more pronounced for women because the long-hours work culture is not conducive to children. As a result, women often leave their jobs way before they actually want children.”

Kelan’s research shows that while women make up about 50 percent of entry level jobs, most organizations say only a third of their middle-management and 10 percent of top management are women.

This is partly because the women high-fliers in Kelan’s book, who are lawyers, consultants, bankers, corporate executives, get disillusioned when men rise through the ranks faster than they do.

Some, fed up with long hours and little leisure time, decide to opt for something different – maybe consider starting their own businesses instead.

Others decide to go to business school to do an MBA to help give them a leg up the management ladder. But even here they find the environment is testosterone-driven.

Kelan gives the example of Iara, who works at an investment bank, but decides to do an MBA to help her career move ahead. She loves the MBA program, but notices that women account for only about a quarter of her group.

She finds most of the activities on the course are designed for men and feels that in effect she is learning how to be “an honorary man.”

Outside the classroom, it is no different. The dominant culture is “heavy drinking and extreme sports.”

LIGHT BULB

Some companies are trying to break the mold.

Aviva, the British insurance company, where women already make up 20 percent of its senior leaders, developed a reciprocal mentoring program, in which a group of women and one gay man with leadership potential were mentored by the 11 members of the company’s executive committee.

“This led to many ‘light bulb’ moments,” Kelan said, where the executives realized their own privilege in having got to the top and why others might struggle to do the same.

The tone from the top, she says, is important in reshaping the organization to allow diverse people to take leading roles.

The drive to get more women into corporate boardrooms could play a part in changing the “tone.”

Norway, which introduced quotas for women directors in 2003, provides an interesting test case. Although it’s not easy to assess how women affect the traditional male corporate culture inside the boardroom.

“It is quite complex,” said Morten Huse, Professor at BI Norwegian Business School, who said a lot of existing research into this area was related to financial performance using quite basic models where it was not easy to see variations resulting from women’s contributions.

“One core element we need to understand is how women make contributions inside the boardroom,” said Huse, who is also a professor at the University of Witten/Herdecke in Germany.

Huse said research did show that if there were just one or two women they would tend to adapt to the existing boardroom culture while there was a big change if the number of women reached “critical mass.”

“In Norway, we see that the traditional roles of independent directors are changing,” said Huse.

His research identifies three types of independent directors at Norwegian companies – directors with some links to the company – known as insiders, directors with links to investors and true independents with no relationships to insiders.

He said that since the introduction of gender balance rules in Norway it was women who often replaced “true independents.”

“So women have taken away much of the old boys’ network.”

Kelan has also looked at the Norwegian experience.

“I was skeptical of the women on boards initiative. We looked at Norway and did find that the more women are on boards the more likely the chairman is a woman or the CEO is a woman. So it does show that there is an increase in women taking leadership positions as a result of quotas.”

Elisabeth Kelan’s book “Rising Stars – Developing Millennial Women as Leaders” is published by Palgrave Macmillan.

(This story has been refiled to fix typo in headline)

(Editing by Paul Casciato)

LONDON, Aug 4 (Reuters Life!) – If your company strives to
have a board with a well-rounded view of the world, staffed with
pragmatic directors who do their homework and aren’t afraid to
ask the tough questions, then it’s probably looking for a few
good women right now.

Companies across Europe are being urged to respond to
pressure for greater gender diversity in top management, and
those which have already embraced their high-flying female
executives have discovered that mixed boards broaden
perspective, focus more closely on performance and may reduce
reckless, ego-driven behaviour.

Some countries, such as Norway and Spain, have introduced
quotas requiring a minimum level of female representation on
boards. Former British trade minister and ex-Standard Chartered
boss Mervyn Davies wants FTSE 100 companies to have 25 percent
women on boards by 2015 and EU internal market commissioner
Michel Barnier has put gender diversity for bank boards on his
radar in the wake of the financial crisis.

But why the sudden push for more women?

The answer seems to be because a lot of research shows that
companies with women directors or even just more diverse boards
tend to do better than those with executive teams made up
entirely of men.

“Women have a different perspective, which can sometimes
lead to better decision-making,” said Elin Hurvenes, founder and
chair of the Professional Boards Forum, which she set up after
the Norwegian government made its demand for more women
directors on company boards.

Hurvenes said a lot of the chairmen who opposed the
imposition of quotas in Norway are now pleased with the results.

“The point is not to focus on whether one gender is better
than the other – it’s the mixture that counts.”

30% CLUB

There has been some progress in Britain since Davies
published his report “Women on Boards” in February.

Since March 1 this year, more than a fifth (21 percent) of
board appointments to FTSE 100 blue chip companies have been
women, according to BoardWatch, set up by the Professional
Boards Forum to monitor progress in women’s appointments.

In May, British engineering services firm Premier Farnell
appointed Valerie Gooding as chairman. Gooding is also a
non-executive director of Standard Chartered and the BBC.

Last month, ASDA, the British supermarket chain, promoted
Judith McKenna, its current finance director, to be chief
operating officer.

The proportion of women on FTSE 100 company boards has risen
to nearly 14 percent as of the beginning of July and the number
of all male FTSE 100 boards is currently 14, down from 21 in
2010.

A group of chairmen of British companies – including Roger
Carr of energy company Centrica and Douglas Flint of HSBC –
have launched the “30% Club” to help bring more women on to
boards.

They argue that having a better balance — at least 30
percent senior female leaders — positively influences both a
company’s culture and the decision-making process.

But companies need to do more if they are to meet Davies’s
demands.

Davies, who was asked by the government last year to review
this issue, stopped short of recommending quotas to speed up the
process even though he said the rate of increase in the numbers
of women board directors in Britain was too slow.

DO THE HOMEWORK

One immediate benefit in Norway was that women tended to do
their homework for board meetings more thoroughly than men.

“One chairman was delighted he no longer saw colleagues
discreetly opening envelopes full of board documents in the
elevator up to the boardroom,” Hurvenes said.

A number of studies have pointed to the benefits of gender
as well as ethnic diversity on corporate boards or in top
management.

Research by British law firm Eversheds in March this year
found that better performing companies tended to have a higher
percentage of female directors.

A survey last year sponsored by recruitment firm Heidrick &
Struggles and WomenCorporateDirectors found that women directors
appeared to be more assertive on a number of “hot button”
issues, including evaluating their board’s performance and
backing more oversight of corporate governance and executive pay
after the financial crisis.

Women have a different experience of the world from the
typical male corporate executive. They are often not afraid to
look stupid by asking the most basic or difficult questions.

“Women are more likely to avoid posturing,” said Denise
Jagger, a partner at law firm Eversheds.

“They can often be more direct because they are pragmatic
and don’t want to waste time getting to the point. Women’s egos
are less likely to inhibit debate,” she said.

“I’ve heard four men repeat essentially the same point one
after another in a board meeting because they are competitive
and each wants to have their say.”

HEADHUNTING

Jagger, who was also company secretary and general counsel
at retailer Asda and holds several non-executive roles, said
that women can often be more empathetic and are less likely to
shy away from potentially sensitive-relationship driven
discussions.

“Men don’t often retrench – it’s more difficult for them to
change their minds which they may regard as a sign of weakness,
not understanding.”

Margaret Johnson, group chief executive of advertising firm
Leagas Delaney and a non-executive director of UK insurer
Admiral, said a diverse team does performs better.

“It’s not just about male and female it’s about different
skills and behaviours, how people deal with conflict.”

She accepts that it will take time for men to get used to
having women around the top table.

“50-plus men as a cohort have not grown up with women in
senior roles – they are a little bit scared. A lot of senior men
are not used to women who talk in a direct, confident way.”

But a big obstacle to getting more women into the boardroom
as non-executives is having a broad range of suitable
candidates.

“The main problem is how to get a bigger pool of women
candidates. The head-hunters are a major problem factor. They
tend to be very conservative and put up predictable and safe
lists. Left of field suggestions are seen as impossible by
them,” said Bob Garratt, visiting professor at the Cass Business
School.

DIAMOND SKIRTS

Garratt is lukewarm on quotas as a way to boost the numbers
of women non-executives.

He said quotas in Norway and South Africa, for example, had
led to a small group of women getting a lot of the appointments.

In Norway, he said these women are known as the “diamond
skirts” and in South Africa the “black diamonds.”

But Garratt believes diversity is crucial in helping a board
navigate and plan a company’s future.

“They need more skills to make sense of a chaotic world with
all the changes in the physical, social, technical environments.

If the board is diverse you will get a better sense of the
trends and patterns in that future.”

But he said it was difficult to get genuine diversity
because many women who make it on to boards have got there by
learning to play traditional corporate and boardroom politics.

“Many of the brightest women executives don’t want to join a
board and play those silly games,” he said. “They prefer either
to break away and form their own businesses or continue to have
more influence through their existing managerial roles,” Garratt
said.

“These women will form the next generation of mid-sized
companies which tend to grow faster and be more profitable.”

(Edited by Paul Casciato)

The Swiss bank is pioneering contingent capital bonds favored by banking regulators. Earlier this week, it sold another to two Middle Eastern investors.

Thursday’s second bond sale gave another boost to a market regulators are keen to see grow, with banks using CoCos to cushion losses and reduce the risk of taxpayer-funded bailouts.

“We have, for some time now, supported the advent of contingent capital in Switzerland and we are pleased to contribute in this practical way to international debate on its role and feasibility,” Credit Suisse chief executive Brady Dougan said.

Together, the two Credit Suisse deals are a positive sign for the nascent market for CoCos, which had initially received a cool reception from traditional fixed income investors, many of whom are not able to hold equity.

Switzerland has encouraged its two biggest banks — UBS and Credit Suisse — to issue the bonds to meet tougher capital rules after the credit crisis.

Dougan said he was “pleased to have successfully completed this next step in our capital plan to transition to the new Swiss regulatory standards well ahead of time.”

The group said it had already secured more than 70 percent of its maximum potential issuance of this type of capital under the proposed Swiss regulations.

Before Credit Suisse, only British lender Lloyds Banking Group and Dutch group Rabobank had issued types of CoCos.

Credit Suisse’s latest deal was marketed to investors in Asia and Europe. The bonds offered a 7.875 percent coupon.

Demand appeared to be good, attracting orders of around $22 billion, according to fixed income market sources.

Credit Suisse plans to raise about 6 billion Swiss francs ($6.3 billion) by offering cornerstone shareholders Olayan Group and Qatar Holding CoCos in exchange for hybrid securities.

The CoCo issue converts to ordinary shares if Credit Suisse’s consolidated risk-based capital ratio was below 7 percent at the end of any calendar quarter.

They can also be converted if Swiss regulators decide that the bank “requires public sector support to prevent it from becoming insolvent, bankrupt or unable to pay a material amount of its debts, or other similar circumstances.”

Credit Suisse said the latest CoCos were expected to carry a BBB+ rating from Fitch and be listed on the Euro-MTF exchange.

(Additional reporting by Emma Thomasson in Zurich; Writing by Alexander Smith in London; Editing by Dan Lalor)

($1 = 0.9574 Swiss franc)

A Reuters survey of major corporate bond investors shows
that some would be willing to buy the bonds under certain
conditions, but they have a lot of questions they want answered.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For the results of the survey please double click on:
[ID:nLDE69D0QR]
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“As effectively a high-yield instrument, this will tend to
limit the investor base because of (investor) mandates,” said
John Hampton, lead manager of UK LV=Asset Management’s corporate
bond fund.

“Whilst we are in a low rate environment, these sort of
instruments will attract investors into the market — hedge
funds, retail investors.”

But he said a big education programme was needed.

Regulators see contingent capital — known as CoCos — as a
way to prevent taxpayers having to foot the bill in the future
if large banks run into trouble.

During the credit crisis, governments had to rescue failing
banks, which left taxpayers with a bail-out bill running into
billions of euros.

But contingent capital would, in theory, give banks an
equity injection when they needed it, potentially making
government intervention less likely.

The Financial Stability Board will present recommendations
on big banks, including CoCos, to the G20 summit next month.
[ID:nLDE6951FU] [ID:nLDE69D25F]

Swiss financial regulators gave their backing to CoCos
earlier this month when they said the bonds could bolster the
capital base of Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz) and UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz).
[ID:nLDE6920GP]

The Swiss regulators’ move has shifted the debate up a gear,
with analysts estimating the two banks would need to raise about
70 billion Swiss francs ($73 billion) in CoCos.

The Basel Committee on Banking Supervision has looked at
them as an option for banks deemed “too big to fail”. UK
regulators are also known to favour them.

PIONEERS

The bonds convert to equity or get written down under
certain conditions, usually when a bank’s capital falls below a
specific level or when a regulator decides a bank is shaky.

UK bank Lloyds (LLOY.L: Quote, Profile, Research, Stock Buzz) and Dutch bank Rabobank [RABN.UL]
both issued contingent-style bonds in November 2009 and March
this year. [ID:nLK695084] [ID:nLDE62B0ES]

These pioneering deals were successful, but were special
cases. Lloyds’ investors were exchanging from impaired bonds
that would not pay coupons, while Rabobank has an extremely
strong balance sheet.

Rating agencies have been cautious about rating CoCos
because of lack of clarity from regulators surrounding the
conversion trigger. They rated Lloyds’ CoCos, but steered clear
of rating Rabobank’s senior contingent bonds. [ID:nLDE6720Y0]

Some investors say the ratings issue is a big hurdle that
needs to be overcome.

“We believe that our clients and the wider investment
community will have far greater appetite for hybrid capital if
these securities have clearly defined and measurable trigger
thresholds, greater uniformity of structure, including fixed
lifetime coupons and fixed maturity dates, and investment grade
ratings,” said David Averre, head of credit analysis at Insight
Investment.

Other European banks are looking at bonds with write-down
and write-up features that do not convert to equity. Italian
bank Intesa SanPaolo’s (ISP.MI: Quote, Profile, Research, Stock Buzz) hybrid Tier 1 bond issue last
month had some of these elements.

Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) is working on a new bond with a write-down
and write-up structure that has no equity conversion.
[ID:nLDE69D1ZP]

DEBT CHEAPER THAN EQUITY

Despite regulators’ desire for bank capital to be mostly
equity in the future, some form of hybrid bonds will be needed
because equity is expensive and relatively scarce.

Hybrids have provided banks with a cheaper alternative to
equity in the past because interest payments on hybrid bonds are
tax-deductible.

Analysts calculate, for example, that UK banks’ cost of
equity works out on average at about 10.7 percent, which
compares with the cost of hybrid debt of about 5 percent
pre-tax.

Investors were cautious about hybrid bonds when they came on
the scene in the late 1990s, but the market is now well
established.

But investors might not forget in a hurry the volatility and
lack of liquidity some bank hybrids suffered during the credit
crisis.
(Additional reporting by Tommy Wilkes; Editing by Will
Waterman)
($1=.9539 Swiss Franc)

The International Monetary Fund (IMF) highlighted the bank funding mountain in its semi-annual Global Financial Stability Report, published on Tuesday. This pointed to nearly $4 trillion of bank debt that needs to be refinanced in the next 24 months.

“If the markets hold up — and that’s a big caveat — banks should be able to achieve these (refinancing) goals if they make use of all the tools available, including the commercial paper markets, secured and unsecured bond markets etc.,” said Marc Tempelman, head of debt capital markets for financials at Bank of America Merrill Lynch.

He said some banks had started pre-funding already and some of their funding needs did not have to be addressed via the capital markets.

“There is also a lot happening in terms of private bilateral funding,” he said.

Banks have also been shrinking their balance sheets, which will reduce the funding requirement.

But given the market’s sensitivity to any fresh sovereign shocks, central banks will still need to be there for the financial sector.

“The one thing that cannot happen now is that central banks withdraw liquidity from banks,” said Gary Jenkins, head of fixed income at Evolution Securities.

“While there’s a penny left in the coffers they will have to fund the banks — they have no choice.”

MATURITY SHRINKAGE

Since the European Union stress tests on banks in the summer, more banks from Europe’s so-called periphery have been able to access the bond markets for funding even though sovereign woes have resurfaced, particularly around Ireland.

Banks’ bond issuance so far this year has surpassed the total for 2009, according to Thomson Reuters data.

Bank issuance in the year-to-date amounts to about $486 billion compared with about $475 billion for 2009 as a whole.

The funding hump identified by the IMF partly reflects a shortening of maturities during and since the credit crisis.

“In covered bonds 10, 15 or even 20 year bonds used to be the norm, since the crisis set in most bonds have been for five years or less,” said Richard Kemmish, head of covered bond origination at Credit Suisse.

“Government guaranteed bonds were only ever intended to be a short-term solution, now that the first programmes are approaching their maturity dates they are contributing to the programs logjam of refinancing needs in 2011 and 2012.”

He said liability management exercises such as those undertaken by Dexia and Banco Popular Espanol recently were a response to potential problems ahead.

“I would expect that many big banks will come to the same conclusion and anticipate these risks.”

(Editing by Sharon Lindores)

Banks that find it tough to access the equity markets
directly could tap the investor base that traditionally buys
these instruments, which convert to equity after a fixed term.

These investors could include equity income funds looking to
boost yields, as well as retail investors, hedge funds and
sovereign wealth funds, bankers say.

“For investors, it’s a way to get income from the coupon on
a bond at a time when banks’ dividend yields are low. The
investors expect the bond to convert and are happy with the
equity risk,” said Prasad Gollakota, head of capital solutions
at UBS.

Convertibles won’t be the first choice for national champion
banks, who can more easily tap existing shareholders as Deutsche
Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz) is doing to raise more than 9 billion euros.
[ID:nLDE68C1FR]

Convertibles upset existing shareholders whose holdings are
diluted on conversion. Still, they are an option for firms that
urgently need capital unable to find buyers for pure equity.

Some banks, such as Fortis, used convertibles during the
credit crisis to shore up capital reserves.

Britain’s Barclays Plc (BARC.L: Quote, Profile, Research, Stock Buzz) raised 1.5 billion pounds by
selling mandatory convertible notes (MCNs) two years ago, mostly
to Middle East investors, when it was in a rush for cash. The
fundraising angered shareholders, however, who were diluted.

When issuance of these bonds rebounded in 2009 after the
credit crisis, the issuers were mainly high-risk corporates,
from firms without a credit rating or a with a rating below
investment grade. [ID:nLJ654450]

CAPITAL HUNGRY

Bank capital is in demand after global authorities told
banks they needed to more than triple the amount they hold to 7
percent, under reforms dubbed “Basel III”. [ID:nLDE68B0H9]

Some banks have already built up extra stores of capital,
but others have more to do.

Germany’s bank association has said the country’s 10 biggest
banks may need 105 billion euros under the new Basel rules.
Irish, Greek, Portuguese and unlisted Spanish banks could all
need additional capital. [ID:nLDE68B0JE]

But institutional investors have limited appetite for new
equity from banks. And on the fixed income side, hybrid Tier 1
bonds that can qualify as capital under the new Basel regime are
still in the design phase. [ID:nLDE68C0OS]

“Multiple solutions are needed,” said one senior debt
capital markets banker at a European bank.

“We believe some banks will closely look at issuing Tier 1
qualifying mandatory convertibles (as some banks did during the
peak of the crisis), as an alternative route to bolster their
Tier 1 capital position,” said Gollakota. “It could be cheaper
for the issuer than pure equity.”

This year convertible bond issuance as a whole has been in
the doldrums because low interest rates, low volatility in the
equity markets and low bond yields have made them less
cost-effective.

In Europe, issuance so far this year is about $13.5 billion,
compared with about $35 billion for the whole of 2009, according
to Thomson Reuters data.

ALTERNATIVE SOLUTION

The traditional convertible bond issuers — companies hungry
for capital such as high-tech or healthcare firms — are finding
high-yield bonds a cheaper option at present.

The drive by regulators to force banks to hold more pure
equity capital could spur some issuance from the finance sector.

“Banks have rarely done mandatory convertibles in the past,
especially in a public format,” said Gollakota. “However, with
the change in regulatory definition of Tier 1, and emphasis on
quality of capital, these instruments are more relevant going
forward.”

Convertible bonds could offer a solution for some banks
because investors who buy convertibles ultimately want equity.

“Convertibles provide investors with downside protection but
they can still participate in the upside,” said David Clott,
senior fund manager – convertibles at Aviva Investors.

“If some banks were to do mandatory convertibles they would
likely be attractive,” said Clott. “We have had a few calls to
sound us out on banks doing convertibles.”

He also said governments might use convertibles or
exchangeable bonds as a possible route to reduce their stakes in
banks they had to rescue during the crisis.
(Editing by Louise Heavens)

Banks have used hybrid Tier 1 bonds in the past to maintain
obligatory capital levels to cushion against bad loans, but
these bonds will no longer count as capital under new rules
unveiled at the weekend by the Basel Committee on Banking
Supervision. [ID:nLDE68B0H9]

The new capital regime aims to make banks more robust and
better able to withstand future crises.

The regulators have given banks 10 years from 2013 to phase
out their hybrids, which are a cross between equity and debt but
cheaper than equity because coupon payments are tax deductible.

Clarity on the phase-out, or “grandfathering” period helped
spur a big rally in Tier 1 bond spreads in the secondary markets
early this week.

“Tier 1s saw a massive uplift on Monday after Basel because
people assumed the bonds would get called (redeemed) at their
earliest call (redemption) dates,” said one financials credit
trader.

CAPITAL PRESSURES

Tier 1 bonds are typically perpetual, but with a redemption
date after five or 10 years. The market convention is for the
bonds to be redeemed at these call dates.

The Tier 1 market rallied by about 6 to 7 points, but has
since given up some of these gains as a few doubts have crept in
about the likelihood of a raft of quick redemptions at premiums
to the bonds’ par values.

Some banks will need to keep hold of existing Tier 1 bonds
while they still qualify as capital to help maintain their
capital ratios.

“For all the optimism that investors would get taken out
quickly at a premium, it could actually be a slow process,” said
Gary Jenkins, head of fixed-income research at Evolution
Securities.

“It’s expensive debt for banks,” he said, referring to the
higher coupons banks have to offer fixed-income investors for
taking on the extra risk that hybrid bonds pose.

“But while it makes a contribution to capital, it could be
best left where it is,” he said. “It’s not all going to be
bought back tomorrow.”

In a note to investors, Jenkins highlighted as an example an
Upper Tier 2 bond issue from Santander’s (SAN.MC: Quote, Profile, Research, Stock Buzz) Abbey unit,
which will not be redeemed at its first call date at the end of
this month.

“You’ll find some Tier 1 bonds with call dates prior to
2013 may not get called (redeemed) at first call,” said Roger
Doig, credit analyst at Schroders.

He said banks would be under pressure to boost equity
capital via retained earnings under the new Basel regulations.

“So if they have some Tier 1s, they are likely to want to
leave them outstanding as long as they can to give them time to
boost equity via retained earnings, which is preferable to doing
rights issues.”

There are about 24 billion euros of Tier 1 bonds with
redemptions coming up for European banks in 2010 and 2011,
according to data from Bank of America Merrill Lynch.
(Editing by Will Waterman)

The Basel Committee on Banking Supervision’s new capital
plans, unveiled at the weekend, aim to make banks safer and
prevent a repeat of the credit crisis. [ID:nLDE68C0R0]
[ID:nLDE68B0BP]

The regime will be phased in in stages from Jan. 1 2013, but
questions remain over the final shape of new hybrids that
regulators want banks to hold. And in the meantime, some banks
have hybrids to refinance.

Banks have used Tier 1 hybrid bonds in the past to help
boost their capital. These instruments have equity-like
characteristics, but are cheaper than equity partly because
coupon payments have been tax-deductible.

Under the new Basel rules, regulators want them to be even
more like equity, with more loss-absorbing features, making them
more costly for banks to sell to investors who will want higher
coupons for taking on the extra risk.

REDEMPTIONS

There are some 24 billion euros of Tier 1 bonds with
redemptions coming up for European banks in 2010 and 2011,
according to data from Bank of America Merrill Lynch.

These banks will have to decide whether to redeem them and
replace them but the regulatory uncertainty will not make this
easy.

Italian bank Intesa Sanpaolo (ISP.MI: Quote, Profile, Research, Stock Buzz), for example, has a 1
billion euro Tier 1 bond redemption due in November.
[ID:nLDE6891IO]

The Basel Committee has said only bonds issued before Sept.
12 should qualify for its transition arrangements.

“It looks to us as though only Tier 1s issued before the
weekend will be grandfathered if they don’t meet the new
conditions,” said Simon Adamson, analyst at CreditSights.

“Instruments issued from now onwards will only qualify for
inclusion in Tier 1 if they meet the loss absorbency criteria
laid out in the recent proposals and those proposals are open to
consultation until the beginning of October,” CreditSights also
said in a note. “There is likely to be a hiatus in new issuance
of hybrid Tier 1.”

Uncertainty over the new Basel rules had kept a lid on new
issuance of hybrids this year. But an upbeat mood in the bond
markets this month has helped spur some deals.

Italy’s Monte dei Paschi di Siena (BMPS.MI: Quote, Profile, Research, Stock Buzz) and Lloyds
(LLOY.L: Quote, Profile, Research, Stock Buzz), for example, did Lower Tier 2 bonds earlier at the
beginning of September.

More were expected to follow. [ID:nLDE6810HR]

“You have a situation of ambiguity rather than clarity,”
said a capital specialist at an international banking group.
“The Basel press release does not give clarity for deals in the
pipeline,” he said.

“Where issues are on an opportunistic basis they may be put
on hold, but some banks could decide to go ahead as coupon
levels are attractive at the moment.”
(Editing by Jon Loades-Carter)

The exchange is the first of its kind involving a covered
bond and could pave the way for other similar transactions from
European banks facing a big hump of bond maturities in the next
couple of years.

Dexia’s exchange, which is voluntary, does not bring in
fresh cash, but gives the company more breathing space in terms
of refinancing outstanding debts.

“The purpose of the offer is to increase the duration of
Dexia MA’s liabilities and take advantage of attractive market
conditions,” Dexia said in a statement.

The firm said the exchange was also designed to improve
secondary market liquidity in Dexia covered bonds.

Dexia aims to exchange the seven bonds with maturities
ranging from November 2010 to March 2014 for three new covered
bonds with maturities of five, eight and 10 years. Each new
series of bonds will have a maximum size of 3 billion euros.

REFINANCING RISK

Covered bonds are backed by pools of mortgages or public
sector loans that remain on the issuing bank’s balance sheet.
Investors have a claim on these assets in any default.

The exchange will help Dexia complete its 2010 funding
programme, one of the lead banks on the deal said.

It will allow the firm to carry out a refinancing that would
otherwise not be possible except through several fundraisings of
the primary bond markets, it said.

Bond exchanges have been widely used by companies and
governments to manage debt maturities.

Banks have also done buy-backs and exchanges of hybrid
bonds, but exchanges of covered bonds are a new direction. Banks
could find it useful as a way to push out debt maturities beyond
2011, 2012, when there will be a lot of banks with bonds to
refinance.

“This tool has been used in the corporate sector and
sovereign sector in the past, now lots of people in the
financial sector are looking at it,” said Richard Kemmish, head
of covered bond origination at Credit Suisse.

“Issuers are concerned about upcoming refinancing in 2011.
You could see exchanges of senior unsecured bonds for covered
bonds and government guaranteed issues for covered bonds. Lots
are looking at it – so watch this space.”

Dexia’s bond investors have until Sept. 15 to accept its
exchange offer.

The banks managing the deal are Credit Suisse, Deutsche Bank
and HSBC.
(Reporting by Jane Merriman; Editing by Sharon Lindores)
($1=.7875 Euro)

Hannover’s deal is only the second insurance hybrid in
Europe this year after French insurer AXA (AXAF.PA: Quote, Profile, Research, Stock Buzz) raised 1.3
billion euros ($1.66 billion) in April via a 30-year
subordinated bond issue. [ID:nLDE63D248]

Lloyds’ Lower Tier 2 10-year deal [NEW/EUB] denominated in
U.S. dollars follows on from a Lower Tier 2 10-year euro bond
from Italy’s Monte dei Pachi di Siena (BMPS.MI: Quote, Profile, Research, Stock Buzz) last week.

There have been relatively few bank hybrid deals this year
due to uncertainty about what type of hybrid bonds will qualify
under new capital rules being finalised by the Basel Committee
on Banking Supervision. [ID:nLDE6860N3]

But the solid tone of the credit markets, investor appetite,
plus a desire by banks to replenish capital sooner rather than
later is likely to trigger a rush of deals before the year-end.
[ID:nLDE6810HR]

“There are four insurers looking at doing hybrids,” said one
financial services banker at a U.S. investment bank.

He said banks could come to the market with eight to ten
Tier 1 hybrid deals before the end of this year and there would
be more Tier 2 capital deals as well.

“The rule changes around Basel will also draw a few Tier 2
deals out,” the banker said.

Banks that issue now would take a bet that regulators would
make allowances, or “grandfather” their existing hybrid capital
deals for a number of years after new capital rules come into
effect from the end of 2012, bankers said.

INSURANCE CAPITAL

Insurance companies, like banks, use hybrid bonds to help
meet capital or solvency requirements that aim to buffer them
against losses.

But insurers need less of this capital than banks because
they are funded primarily by the premiums paid by policyholders.

So insurance hybrids are relatively rare, which is a strong
selling point in a low-yielding environment where investors have
cash to invest, analysts said.

“There might be strong demand,” said Eleonore Lamberty,
credit analyst at ING.

“Traditional investors in bank capital have seen little
supply and there is a lot of uncertainty, so this deal may be
attractive for investors looking for yield and who are used to
volatility in this market.”

AXA’s deal in April was sold at a spread of 205 basis points
over mid-swaps. [ID:nLDE6810HR]
(Editing by Sharon Lindores)
($1=.7846 Euro)