\n
Comment on this story<\/title><path d=\"M14 14V2H2v9.47h8.18L12.43 13ZM3 10.52V3h10v9.23l-2.5-1.66Z\"\/><\/svg><\/button><\/p>\n<p>Comment<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"teaser-content grid-center\">\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">To call\u00a0or not to call, that used to be the question for European banks deciding whether to refinance their riskiest debt in a tussle between\u00a0pleasing investors or satisfying regulators.\u00a0But there might be a compromise available.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">Rising interest rates\u00a0and widening credit spreads over government debt\u00a0are posing refunding\u00a0problems for some of Europe\u2019s smaller banks. This is most evident\u00a0with the riskiest type of bonds, which banks have to issue to fulfill their capital adequacy requirements and which typically include call options giving\u00a0issuers the right, though not the obligation, for early repayment. The surging cost of issuing debt this year has increased so-called extension risk, where investors end up owning a\u00a0callable\u00a0bond for longer than they may have originally hoped on purchase.<\/p>\n<\/div>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">But a medium-sized Portuguese lender, Banco Comercial Portugues SA, has shown a middle way to keep both investors and regulators\u00a0onside. It could have the welcome effect of reducing the increased premium\u00a0to hold extendable\u00a0financial institution debt.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">Bank capital debt\u00a0is designed specifically to absorb losses when banks get into trouble, either by being written down or converted into equity.\u00a0The riskiest type is\u00a0Additional Tier 1 debt\u00a0\u2014 often known as contingent convertibles, or CoCos for short \u2014 which are the most subordinated type of bank debt, with the (usually sophisticated) investor on the hook for the full amount. That\u2019s why the yields are much higher than what\u2019s available on plain-vanilla bonds.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">This is perpetual debt, without a\u00a0maturity date, as it\u2019s equity-like capital that supports the entire balance sheet. The sweetener is these have\u00a0call options usually after five- or 10 years, allowing issuers to redeem early.\u00a0Tier 2 debt, such as the BCP deal, ranks slightly higher in the capital stack\u00a0as it has a fixed maturity as well as call options.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">However, there is absolutely no guarantee that investors will be repaid early. In good times, these types of bonds\u00a0are usually the most lucrative bank debt available;\u00a0but extension risk\u00a0has exacerbated their yields this year.\u00a0<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">European investors typically expect banks to call and refinance these bonds at the earliest opportunity even if it\u2019s uneconomic for the issuer if it requires reissuing similar debt at a higher interest rate. However, this convention is increasingly frowned upon by the European Central Bank, which wants everybody to recognize hybrid debt as permanent equity capital rather than\u00a0regular debt funding. It requires banks to seek its approval if they trigger call options, to ensure they are not compromising solvency. The regulator wants to avoid systemic risk\u00a0if refinancing actions increase the risk of bank failure;\u00a0official bailouts, as seen frequently during the euro crisis a decade ago, have become politically toxic.BCP is following the ECB\u2019s guidance by skipping the December call on its \u20ac300 million ($290 million) Tier 2 bond due 2027, but is softening the blow by offering\u00a0a buyback of this bond into a new deal with a higher coupon and longer maturity. So although bondholders won\u2019t get back full repayment of\u00a0a bond that is trading in the mid-80s cents to the euro \u2014\u00a0which they would if BCP triggered the call option \u2014\u00a0\u00a0they will likely receive a higher level than the market price. Investors who tender the existing deal\u00a0are likely to receive full allocations into the upcoming replacement. The key for the regulator is that the same amount of Tier 2 capital is at least maintained, as the original bond remains, although of a smaller size, and the\u00a0new instrument makes up the shortfall at a manageable extra cost for the bank.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">Similar liability management exercises, or buybacks, have been undertaken recently by a UK\u00a0bank in its AT1 bond, Shawbrook Group PLC, and even by a restructured German lender,\u00a0 Hamburg Commercial Bank AG, in its senior non-preferred debt. Bloomberg News has listed next year\u2019s upcoming calls on AT1 debt. Austrian lender\u00a0Raiffeisen Bank International is the next European institution with an AT1 call date, in mid-December.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">There is no hard-and-fast rule to skipping calls.\u00a0While investors understand that the prospectus allow issuers to do as they choose, European banks have typically exercised the options to keep investors sweet. The situation is different in the US, where bondholders expect borrowers to follow the most cost-effective route in deciding whether to refinance existing debt.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">But due to much higher yields, it is increasingly in the economic interest of European issuers not to refinance. Spanish lender\u00a0Banco de Sabadell SA\u00a0chose last month to skip the call on one of its AT1 deals. Nonetheless, Barclays Plc\u00a0recently called an existing AT1 deal\u00a0and reissued similar debt at significantly higher cost. Credit Suisse AG also did something similar, though\u00a0this was part of a bigger restructuring package that also involved debt buybacks. However, these entities are not monitored principally by the ECB, but by the Bank of England and Swiss regulator Finma, respectively.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">Every bank\u2019s management deciding whether to forego call options has to balance the impact on future investor appetite with the wishes of the regulator.\u00a0If the overall effect on the bank\u2019s capital stack is broadly neutral then market overseers ought to be flexible in these turbulent times. Being shut out of the riskier end of the debt market is a fate no institution wishes to endure, as it can dramatically reduce\u00a0its ability to operate. Over-regulation can be as much of a systemic risk as too light touch. The ECB should bend with the wind where it can, while keeping the overall direction of travel for the European bank capital market to move closer to the US model.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">More From Bloomberg Opinion:<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">\u2022 Credit Suisse\u2019s Foundation Starts to Crack: Paul J. Davies<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">\u2022 The Banking Market Where Profits Are Guaranteed: Marc Rubinstein<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">\u2022 ECB Drains the Punchbowl for Economy and Banks: Marcus Ashworth<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.<\/p>\n<\/div>\n<div class=\"article-body\" data-qa=\"article-body\">\n<p data-qa=\"drop-cap-letter\" data-el=\"text\" class=\"wpds-c-cYdRxM wpds-c-cYdRxM-iPJLV-css font-copy\">More stories like this are available on <a href=\"https:\/\/www.bloomberg.com\/opinion\">bloomberg.com\/opinion<\/a><\/p>\n<\/div>\n<section class=\"dn-ns hide-for-print\" data-testid=\"mostRead\" subscriptions-section=\"content\"\/><\/div>\n\n<br \/><a href=\"https:\/\/news.google.com\/__i\/rss\/rd\/articles\/CBMipAFodHRwczovL3d3dy53YXNoaW5ndG9ucG9zdC5jb20vYnVzaW5lc3MvZXVyb3BlYW4tYmFua3MtYXJlLXBsYXlpbmctZmFzdC1hbmRsb29zZS13aXRoLXRoZWlyLXJpc2tpZXN0LWRlYnQvMjAyMi8xMS8yNS8zOGFkMDk5Yy02Yzg3LTExZWQtODYxOS0wYjkyZjA1NjU1OTJfc3RvcnkuaHRtbNIBAA?oc=5\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Comment on this story Comment To call\u00a0or not to call, that used to be the question for European banks deciding whether to refinance their riskiest debt in a tussle between\u00a0pleasing investors or satisfying regulators.\u00a0But there might be a compromise available. Rising interest rates\u00a0and widening credit spreads over government debt\u00a0are posing refunding\u00a0problems for some of Europe\u2019s …<\/p>\n","protected":false},"author":1,"featured_media":36441,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[161],"tags":[],"_links":{"self":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts\/36440"}],"collection":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/comments?post=36440"}],"version-history":[{"count":0,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/posts\/36440\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/media\/36441"}],"wp:attachment":[{"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/media?parent=36440"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/categories?post=36440"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.brandon.ddtest.info\/multisite-test\/wp-json\/wp\/v2\/tags?post=36440"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}