The European Banking Authority (EBA) - which was charged with drafting many of the technical standards for new-style bank capital instruments - is set to release an eagerly anticipated consultation paper in April, which some bankers hope will give much-needed clarity to get the hybrid market restarted.
However, others believe it could be some time before this happens as the consultation process is expected to last three months, and anything that is agreed will then have to be finalised at the EU level by the European Commission and the European Council. They agree, however, that issuers need to think ahead in order to move fast when clarity emerges.
"For any bank looking at issuing Additional Tier 1 with conversion into equity early next year, they need to get shareholders' approval now," said a hybrid solutions specialist. "What gets approved in the AGM lasts for some time and no bank would want to do an extraordinary AGM to get shareholders approval for issuance of hybrids."
He added that most banks in Europe thinking of using this style of equity conversion would need to get approval, otherwise they would have no legal basis to issue the shares.
Another banker said Swedbank's move mirrors that of Credit Suisse in its 2010 AGM. It went on to privately place contingent capital with two of its key shareholders.
Sweden's banks have been asked by the regulator to hold 12% of Core Tier 1 capital by 2015. Thomas Backteman, a spokesman for Swedbank told Reuters that the bank's board received approval to issue bonds equal to a maximum of 10% of the bank's outstanding shares.
Swedbank expects the Swedish regulator to make a decision on new-style hybrids after a Europe-wide recommendation this summer.
Once clarified, the bank would likely issue the new deal in two tranches, one for institutions and a smaller piece for retail investors, he said.
Deals sold under CDR4 will be different from the contingent capital instruments launched by UBS and Credit Suisse. Apart from Switzerland, no other European regulator has opined on contingent capital.
Additional Tier 1 is expected to be part of the European bank capital armoury and will be able to absorb losses either through equity conversion or permanent write-down if a bank is non-viable. On a going-concern basis, the threshold for so-called loss-absorption will be 5.125% of Core Tier 1, compared to 7% for Swiss banks.
WRITE-UP AN OPTION?
For banks that have missed the AGM window, there might be another route however. Bankers expect that on a going-concern basis, the EBA will permit Additional Tier 1 instruments to also losses to be temporary and for write-up features to be allowed, potentially making them a lot more palatable for institutional investors.
However, jumping over the hurdles to make this type of structure work for issuers is not easy. Accounting treatment of bank capital instruments with temporary write-down is not as favourable as those with permanent write-down.
Meanwhile, how the instruments get accounted matters when it comes to hedging. If accounted as equity, they cannot be hedged which is a problem for banks that want a currency or interest rate swap on a deal as it can create volatility in its P&L.
Still bankers remain optimistic. "Once we have clarity from the EBA, it will give national regulators more freedom to discuss structures with banks," said a hybrid solutions banker. "Having said that, it might be that if issuers can't be sure that they get 100% regulatory treatment, the pipeline might shrink."
Bankers are eager for clarity to emerge soon as private bank investors have been very receptive to most hybrid structures this year with transactions for the likes of Banco do Brasil or Swiss Re attracting huge order books. (Reporting by Helene Durand)
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