Talking Bout A Resolution
Lessons Learnt From Resolution Outcomes
‘White Knights’ Only Exist In Fairy Tales: In our opinion, the ‘Sale of Business’ resolution tool applied to Banco Popular highlights the gamechanging nature of playing distressed financials in a BRRD world. While, historically, the sale of a distressed institution to a large well-capitalized peer delivered an optimal outcome to bondholders, it is now a much less viable option, in our view. Crucially, the ‘Sale of Business’ tool effectively allows for an acquirer to reduce the execution risk by effectively subsidizing the acquisition via pre-resolution PONV of the subordinated debt. As a result, we think that the price action on subordinated debt may be more volatile when capital raising is no longer a viable option. Moreover, this may well have an implication in terms of M&A transactions with the obvious consequence being a more limited appetite to consider a deal with a weak lender if a much better offer is possible under resolution. Only Preferred Senior Is ‘Safe’: We would caution against any positive readacross for the broader ‘Senior’ asset class from the fact that Banco Popular senior was not impaired. While we think that NCWO provisions will likely inhibit the impairment of Preferred Senior, we think that Non-Preferred Senior will be impaired in future resolution outcomes. Having said that, we would not go as far as claiming Preferred Senior debt is completely out of reach from the bail-in tool as evidenced by very fluid special situations in the UK and Italy.