Reuters: Bankruptcy News: UPDATE 1-EU tests sub debt bail-in blueprint in Spain

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

UPDATE 1-EU tests sub debt bail-in blueprint in Spain Jul 12th 2012, 16:17 Thu Jul 12, 2012 12:17pm EDT * Investors say measure could pressure other Tier 2 debt * Creation of bad bank would crystalise weak banks' losses * Bondholders likely to receive equity in putative exchanges (Adds comments from financial advisers) By Jean-Marc Poilpre LONDON, July 12 (IFR) - The European Union plan to impose losses on the holders of Spanish subordinated debt that need recapitalising has unsettled some fixed income investors, who fear, following the experience of Ireland, that this could become a blueprint for all eurozone banks. Any burden-sharing exercise will mostly affect Spanish retail investors, who bought almost two-thirds of subordinated debt - chiefly preferred shares - sold by the likes of Bankia, CatalunyaCaixa, NovaCaixaGalicia and Banco de Valencia. One adviser said the draft memorandum made clear that such investors would be offered to exchange their instruments for equity with no cash alternative provided, unlike in the Irish exercises. Analysts at Bank of America Merrill Lynch estimated that these four banks have some EUR20.5bn of subordinated debt (including EUR6.9bn of Lower Tier 2 debt). The total of Spanish sub debt, excluding Santander, BBVA and CaixaBank, is estimated at EUR35.4bn. "Above all these banks need capital," said the adviser, adding that it was also spelled out that holders of more senior debt or covered bonds would not suffer haircuts. Another adviser pointed out that domestic retail investors had not been given special treatment in March's EUR200bn Greek 'private sector involvement' debt swap, estimating that bonds with an original nominal value of EUR5bn had been affected. The EU's leaked Memorandum of Understanding with Spain opened up questions on the implications for other European banks and fears of rating agency downgrades - although Fitch said on Thursday it already reflected the likelihood of burden-sharing in its ratings. The MoU states that Spain would have to put in place legislation for more effective voluntary liability management and potentially allow mandatory subordinated liability exercises, by the end of August. "This looks like very much like the Irish template and could become a blueprint for eurozone banks, which will be forced to write down their hybrids if they need capital support. This could potentially put pressure on Tier 2 spreads," said Paul Smillie, bank analyst at Threadneedle. Many were hopeful that there would be voluntary burden-sharing and coupon suspensions, rather than enforced haircuts. For many market participants, the Irish "voluntary" liability management followed by coercive exercises is anathema, and they feel Ireland should probably not have been allowed to get away with it. IRISH TEMPLATE Otto Dichtl, a managing director at Knight Capital Europe, views the burden-sharing looming in Spain as negative for subordinated debt across Europe as "the EU seems to again disregard existing legal positions in their zeal to cram down losses on subordinated bondholders". "It remains questionable if the plans are legal, but so far nobody has sufficiently and successfully challenged the comparable haircuts in Ireland," he added. However, the idea of burden-sharing did not come out of the blue and several analysts, including those at BofA Merrill Lynch, agree that some sort of burden-sharing had always been on the cards. Furthermore, the market reaction was mixed. On Wednesday, the iTraxx Subordinated Financials index underperformed other indices, such as the Crossover and the Senior Financials index - but by Thursday the Subordinated was again trading in line with the rest of the indices. In the cash market, flows were extremely thin and traders said that there was not any selling pressure. Not only have a lot of bonds have been bought back by issuing banks, the paper sold by smaller banks is notoriously illiquid. Some individual Spanish names did widen in the synthetic market. For instance, the CDS on Banco Popular Espanol's subordinated debt was quoted by CMA on Wednesday morning at a mid-spread of 1,969.5bp, compared with 1,348.4bp quoted at Tuesday's New York close. Bankia's subordinated debt was quoted at a mid-spread of 1,597.76bp, much wider than the previous day's closing level of 1,255.91bp. CRYSTALISE LOSSES The second-tier banks could be most affected by the MoU call for the creation of a bad bank. Threadneedle's Smillie points out this would force banks to crystalise losses now. "This means the likes of Sabadell or Banco Popular, who may have thought they could use earnings to make provisions over time, may have to take a hit now and may also have to do coercive tender offers in the short term," he said. BNP Paribas credit analysts expect mid-sized banks such as Popular and Sabadell to require state aid. "It is more uncertain in our view for CaixaBank, although we also view it as being at risk," they said in a report. Santander and BBVA, meanwhile, remain above the pack and are seen as unlikely to require any recapitalisation and therefore should have no need to squeeze money out of their bondholders. (Reporting by Jean-Marc Poilpre; additional reporting by Christopher Spink; editing by Philip Wright, 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