Reuters: Bankruptcy News: Burden-sharing back on the agenda as AQR gets under way

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Burden-sharing back on the agenda as AQR gets under way Nov 1st 2013, 13:08 Share this Email Print Reprints Fri Nov 1, 2013 9:08am EDT * Lack of agreed backstops puts bondholders in firing line * Burden-sharing most likely for mid-tier peripheral banks * Any action could reverse strong market tone By Helene Durand LONDON, Nov 1 (IFR) - Market participants are concerned that governments targeting subordinated bondholders to fill capital holes uncovered by the European Central Bank's Asset Quality Review of banks' balance sheets could derail peripheral banks regaining full access to capital markets. The market has seen ad-hoc burden-sharing events, such as SNS Reeal back in February, but in theory, state aid rules passed in August make it automatic that bank equity and junior debt will be used for recapitalisations before taxpayers inject fresh equity. And until a federal backstop is created - which is not expected until the completion of the banking union in 2018 - there are limited options for banks short of capital. "There is a risk that the eurozone crisis could be reignited," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management. "There is not a lot of clarity right now as to what will fill capital holes that cannot be filled with private capital." The ECB, supported by some member states, would like to exempt banks from bail-ins if they meet the regulatory requirements; the European Commission, supported by Germany, wants to stick to the new rules. The wrangling is not helpful to a market that has shown signs of returning to full health. Eurozone peripheral banks have made the most investors' renewed risk appetite in recent weeks, selling them a range of debt instruments, including deeply subordinated debt, and closing the spread gap with core European issuers. "There is a concern that some of the banks that come out badly from the AQR and stress tests could end up being pushed over the cliff," said Tim Skeet, a managing director in debt capital market, EMEA, at RBS. "If investors fear that the stress tests will push banks to the point of non-viability, then why would they subscribe to instruments where there is a chance they could be knocked down?" IDENTIFYING THE WEAKLINGS Large eurozone banks are expected to pass relatively unscathed, but the mid-tier, especially in the periphery, are not. RBS analysts wrote last week that they expected 15-20 of these banks to show capital shortfalls and highlighted Bank of Cyprus, Abanka, Monte dei Paschi, Banca Carige, Banca delle Marche and Catalunya Banc as among those that would come out worst. They said Muenchener Hypo and IKB in Germany also looked weak. Their view was shared by Moody's analysts, who said this week that Italian banks in particular looked weak. "The 8% minimum capital buffer is credit negative for junior bondholders of Italian banks that are now close to or below this threshold or that have weak asset quality," Moody's added. "It will be challenging for these banks to close the capital shortfall with private resources, which raises the possibility of a public intervention and ultimately a bail-in." Analysts at RBS believe that instead of a straight wiping-out of subordinated debt, burden-sharing could come next year in the form of liability management exercises or reduction in Tier 1 coupons. However, Aberdeen's Williamson said that should holes be found that cannot be filled by the bank, the SNS route could be one that is used. "I wouldn't be surprised to see subordinated debt wiped out in certain cases in order to pay the bill, although I don't think senior debt would be touched." (Reporting by Helene Durand, Editing by Alex Chambers, Philip Wright) Link this Share this Digg this Email Reprints

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