Reuters: Bankruptcy News: EC readies final word on bail-ins

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EC readies final word on bail-ins Jun 1st 2012, 17:13 By Helene Durand Fri Jun 1, 2012 1:13pm EDT LONDON, June 1 (IFR) - Funding officials, debt bankers and investors are keenly awaiting the European Commission's release of its final proposals on bail-ins next week, more than a year after it began consulting the market on the topic. The directive text, which will give regulators wide-ranging powers to resolve failing European banks, is expected on June 6, and the Commission has kept the market in suspense by circulating at least three versions of the draft. The initiative is part of an attempt to ensure that taxpayers do not foot the bill for future bank bailouts, or at least see that bondholders take the first hit. Two versions seen by IFR differ on a number of points, in particular on when bail-ins would be implemented. In one version, the implementation was January 1 2018; in the other, implementation would have to be done by that date "at the latest". Market participants believe that the first option could open a valuable window of opportunity for banks to sell senior paper with maturities up to 2018, if there is a resolution to the sovereign debt crisis that has stymied issuance for months. Some suggest it could also lead to a tightening of funding levels for short-dated maturities, although trades with a maturity beyond 2018 could widen out. According to Thomson Reuters data, European senior bank issuance has dropped to USD126bn so far in 2012 while last year's EUR305bn was well below previous years, including the USD626bn seen in 2006. "All senior debt would be captured if it is outstanding at 2018, so in theory banks can still issue a five-year note, which would not be 'bail-in-able' while a seven-year would be," said Daniel Bell, head of EMEA DCM new product development at Bank of America Merrill Lynch. But some investors were sceptical. "It could be positive," said a FIG analyst at a fund manager. "However, are you telling me that if a big bank like Intesa needed to be resolved in two years time, it would be done without a negative impact on senior debt?" Roger Doig, fixed income analyst at Schroders, said that other tools available to regulators, for which implementation is due by 2015, could have the same effect as bail-ins. "The other tools in the draft, such as the bridge, bank could have the same effect of exposing bondholders to losses as bail-ins," said Doig. "The main difference is that a bail-in is an acceleration event, and all bonds can be written down equally across the term structure when that event happens. Whereas in a bridge bank, if you have shorter duration holdings, there is a possibility you may be made whole." Should the Commission opt for implementation by January 1 2018 "at the latest", however, that could spell an end to any hopes of a strong revival of the senior market, as there would be a risk of countries accelerating implementation. SILENT ON GRANDFATHERING Neither text seen by IFR mentioned grandfathering outstanding senior debt. "It's difficult to see how grandfathering would work," said Doig. "They appear to have set a date for introducing bail-in far enough into the future that only a limited number of bonds issued prior to discussion of bail-in will be outstanding," he said. "So you don't need grandfathering either." That view was echoed by a number of bankers familiar with the draft and close to the Commission. One concern has been that permitting grandfathering would create a cliff effect and store up issues for later. "We would be aggrieved if a senior bond we bought now suddenly became bail-in-able overnight," said Robert Montague, senior investment analyst at European Credit Management. According to Thomson Reuters data, European banks have just under USD123bn equivalent of debt outstanding with a maturity beyond 2018. In the drafts, the Commission reiterated that in order to avoid institutions structuring their liabilities in a manner that impedes the effectiveness of the write-down tool, the minimum amount of own funds and eligible liabilities which must be held as a percentage of total liabilities should be 10%. It also said that the requirement should be mandatory for institutions or group of systemic relevance. NOT ONLY SENIOR Bankers said that the Commission's decision to widen the scope of liabilities that can be bailed-in, which could include deposit guarantee schemes and derivatives, should ease the pain on senior debt. Simon McGeary, head of new products group at Citigroup said that the potential inclusion of deposit guarantee schemes could be a positive. "If you include those, then having 10% of bail-in-able liabilities becomes a less demanding task," he said. "If you look at how banks' balance sheets have changed in recent years, the slice of senior unsecured debt is much narrower than it used to be." He added that, looking at the size of the European banking sector, banks may need to have around EUR1tn of bail-in-able liabilities, which would require investor appetite for senior debt to remain at least at the level of recent years. Bank of America Merrill Lynch's Bell said that net liabilities under derivatives contracts could be eligible for bail-in, although the draft included a carve out for local regulators if they think derivatives are important to achieve the resolution objectives. Investors say that the inclusion of other senior creditors that would rank pari passu with holders of senior unsecured debt could be beneficial, as it would broaden who has to take the losses. "However, it does not impact that probability of default, which is the more important factor in pricing the credit," said Doig. BAIL-IN A LAST RESORT? Bankers said the European Commission was going in the right direction and that, after months of heartache, the market should be able to digest the directive well, especially as they think the Commission is aware it should not cause more damage to the market. "There is just as much focus on prevention tools as there is on resolution tools, and bail-in just one of the tools available if prevention doesn't work," said Bell. "I see resolution and therefore bail-in as last resort tools, and overall the draft adopts a fairly reasonable approach to it all, although the treatment of shareholders remains a bit fuzzy." McGeary said that investors "have been very nervous about this - and with good reason - as it rewrites corporate laws that have been around for a long time. However, if the directive genuinely achieves the same outcome for bondholders as a liquidation scenario, then I think investors will be able to get to grips with that." (Reporting by Helene Durand, Editing by Alex Chambers, Marc Carnegie) Link this Share this Digg this Email Reprints

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