Reuters: Bankruptcy News: End of an era looms as EC acts on bail-ins

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End of an era looms as EC acts on bail-ins Jun 8th 2012, 17:15 By Helene Durand Fri Jun 8, 2012 1:15pm EDT LONDON, June 8 (IFR) - The European Commission began the mammoth task of trying to strip out state support from senior bank debt this week, finally releasing its much-anticipated Crisis Management Directive. The legislative proposals will give regulators across Europe a wide range of tools to prevent and resolve bank failures, including the power to impose losses across the bank capital structure - even on senior debt. Brought into being after the worst global financial crisis since the Great Depression, the sweeping new regulatory powers mark the end of an era on the funding landscape in Europe. "With resolution regimes, bail-ins are part of the equation, it is part of the new world," said Khalid Krim, head of capital solutions at Morgan Stanley. "The sovereign crisis has opened investors' eyes to the fact that governments and taxpayers money won't be there to protect bondholders." Since the Commission publicly released its consultation draft last year, there have been fears that the changes will keep investors from buying senior debt, or impose such a high premium that it will be uneconomical for banks to issue it. Even with the changes looming for more than a year, however, banks have still been able to raise funds in the senior unsecured format. What has prevented them from accessing the market is the sovereign crisis, which has also had a big impact on bank spreads. QUIET FOR NOW In general, initial reaction to the changes has been muted. "The market had already built itself up for bail-ins, and banks' curves were already relatively steep," said Andrew Fraser, FIG analyst at Standard Life. "What may happen over time is a tightening of the short-end rather than a blow-out of spreads at the long-end. The senior market will continue to function and banks will still be able to issue senior debt," Fraser said. He added that funding overall would remain expensive, and that banks would have to pay an additional premium for longer dated debt, a view shared by other investors. "But you have to remember that banks' senior needs are not as big as they previously were, as they shrink their balance sheet and diversify into instruments such as covered bonds," Fraser said. John Raymond, analyst at CreditSights, said it was a bit surprising that the market had not moved significantly, and that banks' curves had not really steepened. "Ultimately banks will be able to continue to issue senior debt, and what they have to pay for it will be influenced by the spread environment at the time," Raymond said. But he and other investors said that the EC's estimate of a 5bp-15bp cost impact from the new regulation was optimistic. "You can only get to that number if you assume that only the strong banks will be able to fund," said Edward Farley, principal at Pramerica. "For riskier banks where bail-in is not so remote, they will have to use more secured funding," Farley said. 'And I doubt many will issue unsecured beyond 2018." THE NEED TO ISSUE Banks will certainly need to be able to issue, given that the Commission recommended that banks have at least 10% of liabilities, excluding regulatory capital, that are bail-inable. "While the 10% of liabilities is not a legal requirement, it will become enshrined and we will start to see this magical number become hardwired," said Etay Katz, a partner at law firm Allen & Overy. A research note published by HSBC this week estimated that banks would need around EUR1.1trn of new bail-in debt by 2018. The note said that, while it was a positive that Deposit Guarantee Schemes (DGS) would be included, the fact that they are not pre-funded could make the proposal politically unacceptable, as taxpayers would effectively need to bail-out the schemes. The proposals do not just allow for DGS to be included, and throw in a wide range of instruments ranging from derivatives to anything longer than a month, potentially diluting the pain for bondholders. The Commission also offered banks an olive branch by delaying implementation of the bail-in requirements until 2018, although the other tools such as bridge banks will be implemented from 2015. Once they take effect, however, there will be no grandfathering of outstanding debt. Many in the market wondered last week if banks would try to issue with maturities before 2018 or if they would in fact try and start issuing beyond that date, especially as outstanding deals did not really widen. "My sense is that issuers would like to dip their toes in the water and issue debt with a maturity beyond 2018 sooner rather than later," said Katz. "Given that they know this is coming down the line, you would not be doing yourself any favour in postponing until implementation date, in the same way that some banks have already begun to comply with the upcoming regulatory framework." Investors, however, will be able to pick and choose. "We will certainly be more selective in terms of which banks we chose to invest in," said Pramerica's Farley. "As far as weaker banks are concerned, we would rather wait, and generally don't feel in any rush to pile into eurozone banks right now anyway." (Reporting by Helene Durand, Editing by Marc Carnegie) Link this Share this Digg this Email Reprints

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