Reuters: Bankruptcy News: Banks fortify balance sheets ahead of bail-ins

Reuters: Bankruptcy News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

Banks fortify balance sheets ahead of bail-ins Nov 29th 2012, 15:00 By Aimee Donnellan and Natalie Harrison Thu Nov 29, 2012 10:00am EST LONDON, Nov 29 (IFR) - European banks will use Tier 2 instruments and other forms of subordinated debt to boost total capital levels until there is more clarity on the regularity and tax treatment of hybrid Tier 1 debt in 2013, bankers and issuers said at Citi's European Credit conference on Thursday. Over the course of 2012, banks have focused on raising Tier 2 capital mainly to protect senior bondholders that are under threat of looming bail-ins. The low rate environment has ensured the cost of Tier 2 capital is relatively low and there is less regulatory uncertainty surrounding these instruments. As much as EUR200bn of Tier 2 could potentially hit the market over the next few years. Once rules governing Tier 1 are clearer, issuance could be as large as EUR150bn. "Issuers will want to take advantage of market windows as there is a feeling that if they leave it too long then they will get caught up in a lot of supply," said Simon McGeary, head of new products group at Citi. Facing a mixture of investors, bankers and issuers in London, a panel of market experts said that other new products could start to appear, including Intermediate Subordinated Debt effectively the return of Tier 3 capital - short-dated subordinated debt - that would sit as a buffer between senior and Tier 2. This layer would help to shield senior unsecured bondholders from the looming threats of bail-in. "This will make sense for some issuers even if it acts purely as credit support for senior," said McGeary. But issuers had mixed views. Rabobank, which has bolstered its total capital through the issuance of two Tier 2 deals this year said it was likely to be proactive in such instruments. Michael Gower, treasurer at the Dutch bank, said there was a risk that investor concerns about the risks for senior bondholders regarding bail-in could re-emerge, and that senior bondholders would therefore want comfort about what debt was sitting below them as loss absorbers. "We're likely to be more proactive in this process and we will look at potential Tier 3 instruments very closely, and it would not surprise me if there was more regulatory clarity on this area," said Gower. Other panellists were less receptive, saying that bank capital structures were already very complicated and that such new instruments would just add more complexity. Jennifer Moreland, head of long-term unsecured and capital issuance at Barclays, said she found it hard to get excited about Tier 3. "There are already so many layers of capital to analyse, and the market is still not doing a good enough job of pricing those," she added. UNSTOPPABLE BAIL-INS The bank capital market has been helped by increasing investor appetite for higher yielding product and as the European Banking Authority prepares to provide further clarity on temporary write-downs, banks are expected to go a step further begin to sell Additional Tier 1 hybrid debt. The importance of raising capital was emphasised throughout the morning session as bankers noted there is a clear link between higher capital levels and lower funding costs. Maintaining a fortress balance sheet with strong capital levels was important to maintain access to the senior debt market at attractive levels, McGeary said. The fact that investors have already been buying senior debt past the 2018 watershed when bail-ins will come into force under the Crisis Management Directive was an encouraging factor on the prospects for senior issuance. "There is a feeling that the move to senior bail-ins is unstoppable now," said McGeary. "Not only is it going to happen, but the market has been quite grown up about it." Regulatory uncertainty surrounding Basel III is expected to continue well into 2013 as bankers expect more clarity on the European CRD4 by the middle of next year. European and US banks have been seeking to delay the release of stricter capital rules recent weeks as they seek out more clarity on a number of sticking points including SIFI buffers and bank remuneration. (Reporting by Aimee Donnellan, Natalie Harrison; editing by Helene Durand and Alex Chambers) Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions