Reuters: Bankruptcy News: Bail-ins, market window trigger Tier 2 stampede

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Bail-ins, market window trigger Tier 2 stampede Sep 7th 2012, 09:45 By Helene Durand Fri Sep 7, 2012 5:45am EDT LONDON, Sept 7 (IFR) - European banks, tired of waiting for regulatory certainty on bank capital instruments and seeking to protect their senior bondholders from soon-to-be-implemented resolution regimes, raised around EUR3.6bn-equivalent of Tier 2 debt in what was the busiest week for the asset class in years. Rabobank, Skandinaviska Enskilda Banken and ABN Amro sold large benchmark issues in euros, dollars and sterling, and expectations are that more banks will follow, with deals already expected from Danske Bank and Raiffensen Bank International. Issuers are acutely aware that with the European Crisis Management Directive (CMD) due to come into force in 2015, regulators will have greater powers to impose losses on bondholders. One of the key elements of the Directive is the introduction of the bail-in tool, which could apply to senior debt, although that won't be implemented until 2018. "Issuers are looking ahead to when bail-ins will be introduced and are aware that they need to raise their total capital," said Daniel Bell, head of EMEA DCM new product development at Bank of America Merrill Lynch. "The cheapest way to do this is to raise Tier 2. Furthermore, by doing deals before year-end, borrowers will be able to include the amount in the subordinated debt grandfathering bucket which may help them with transitioning to the new regulatory framework." This was one of the reasons why Rabobank decided to launch a dual-tranche euro and sterling transaction. The bank has just EUR2bn of outstanding Tier 2 paper and has not issued in the currency since 2010, while the sterling deal is a Tier 2 debut in that particular market. "Rabobank stated in its half-year results that it was intending to increase capitalisation levels in order to minimise the impact of the upcoming Crisis Management Directive and these deals were in line with this new strategy," a funding official at the bank said. Rabobank has set itself a target of 14% Core Tier 1 and 17.5% Total Tier 1, and will seek to add Tier 2 on top of that to mitigate the bail-in risk for senior debt holders once the Crisis Management Directive becomes effective. Rabobank is a prolific user of the wholesale funding markets, which explains why it would seek to bolster its total capital to protect senior debtholders. According to its second-half results, the bank had just under EUR189.5bn of long-term debt outstanding and just under EUR341bn of customer/corporate deposits. In 2009, 2010 and 2011, it issued more than EUR40bn in the wholesale markets and it had raised EUR23bn this year as of June. Meanwhile, SEB, which had not brought any Tier 2 since 2005 told IFR the reason why it had returned after such a long absence was to fill "a very empty Tier 2 bucket" and that this Tier 2 would act as a buffer for senior bondholders. Issuers were also helped by an improvement in market conditions which has seen spreads, particularly in senior, rally by over 100bp since the beginning of the year, even in the strongest names, and which is leading investors to move further down the credit spectrum. TIRED OF WAITING As well as wanting to get ahead of the curve and increase the layer beneath senior, issuers, who have been waiting for regulatory clarity for two years, have decided not to wait any longer, as the European version of Basel 3 due to implemented in 2013 looks set to be delayed further. "It's increasingly clear implementation of CRD4 may be delayed and it will take longer before we have sufficient clarity on several aspects relating to new-style instruments" said Johan Eriksson, EMEA head of global capital solutions at UBS. "Lack of clarity provides strong arguments for issuers to issue early with less onerous terms compared with some of the more investor unfriendly alternatives being discussed. Adding to this is the fact that there is so much Tier 2 rolling off this year and next and banks need to refinance much of that." The deals launched this week complied with the old regulatory framework but did not have specific loss-absorption features as required by Basel 3, which will ask for all bank instruments to absorb losses before a government injection is made. Instead, in most cases, they made reference to upcoming statutory resolution regimes in the risk factors of the prospectus, something investors are getting more and more comfortable with after initially dragging their feet. "There is widespread agreement amongst investors that if you include reference to upcoming resolution framework in the risk factors, they will not be structurally subordinated to an issuer's outstanding Tier 2 debt, and that from a timing perspective, exposure to non-viability risk would occur at the same time," said Alex Menounos, head of Morgan Stanley European IG debt syndicate. "It's a different story if you're buying Tier 2 with contractual point of non-viability language." He added that while the language in Tier 2 deals had evolved, the fact that banks were now managing to much higher core and total Tier 1 capital ratios meant that buying Tier 2 was arguably a very different proposition. (Reporting by Helene Durand, Editing by Julian Baker) Link this Share this Digg this Email Reprints

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