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SNS Wipeout Escalating Senior-Bond Loss Risk: Corporate Finance
2013-02-06 00:01:00.6 GMT
The Dutch government’s unprecedented expropriation of SNS Reaal NV’s subordinated debt is igniting
investor concern that European regulators will impose losses on
senior bondholders in other failed banks.
About 900 million euros ($1.2 billion) of the Utrecht,
Netherlands-based lender’s debt securities were taken when it
was nationalized last week. That’s the first time European
authorities have immediately wiped out holders of dated
subordinated bonds of a bailed-out bank, according to data
compiled by Bloomberg.
Germany, the Netherlands and Finland want to accelerate
European Union plans to force losses on senior bondholders of
failing banks, three government officials said yesterday.
Investors are now watching Banca Monte dei Paschi di Siena SpA,
which asked the Italian government for a second bailout. The
cost to protect against losses from the Siena-based lender’s
senior bonds rose 30 percent to a four-month high of 606 basis
points in the past week, data compiled by Bloomberg show.
“There’s an evolution going on that is eventually going to
involve senior debt,” said Steve Hussey, a credit analyst in
London at AllianceBernstein Ltd., which manages $430 billion.
“It was quite shocking that subordinated debt was written off
with zero recovery as a way of sharing the pain.”
Mandatory Coupons
Before the financial crisis, investors viewed the type of
dated subordinated debt seized by the Netherlands as equivalent
to senior bonds, except in a default, because the securities had
mandatory coupon payments protected by an issuer’s layer of
capital. Bank collapses since the credit crisis are spurring
regulators to find ways of imposing losses on bondholders, even
as they bail out the lenders.
Regulators, meeting through the Bank for International
Settlements, are calling for measures to be in place from 2018.
Germany, the Netherlands and Finland, three of the AAA
rated states in the 17-nation euro area, called last week for
regulators to gain so-called bail-in powers, said three
government officials, who asked not to be named because the
talks are private.
While governments have impaired the capital securities of
lenders in previous rescues, the outright transfer of ownership
of the SNS dated subordinated bonds is “unprecedented, at least
in Europe,” said Nick Hill, an analyst at Moody’s Investors
Service in Paris.
Financial Strength
SNS’s senior rating was cut to Ba2, two levels below
investment grade, by Moody’s on Jan. 31 and the firm said it may
downgrade the bank again. On Feb. 4, the New York-based company
reduced SNS’s dated subordinated debt rating to C, the lowest
junk grade, from Caa3 after the nationalization. Standard &
Poor’s grades SNS’s senior debt at BBB-, the lowest investment
grade.
Dutch Finance Minister Jeroen Dijsselbloem told Parliament
Feb. 1 all debt of European banks, including senior notes,
should be available to cushion losses. The Netherlands’ central
bank warned against the move this time because it risks curbing
funding to the nation’s other lenders and because the government
didn’t want to pre-empt the BIS-led talks, he said.
“It’s a relatively aggressive rhetoric that the Dutch
government is using,” said Hill at Moody’s. “Given the finance
minister’s role as president of the Eurogroup of finance
ministers, that’s something that may have broader
implications.”
Bank Debt
The cost of insuring against losses on senior bank debt
rose after the SNS nationalization was announced. The Markit
iTraxx Financial Index of credit-default swaps on the senior
debt of 25 European banks and insurers has since climbed nine
basis points to 155 basis points.
Imposing partial losses on subordinated debt in bank
failures isn’t new. The U.K. changed the law to turn Bradford &
Bingley Plc’s dated notes with mandatory coupons into undated
securities with optional interest payments when the property
lender collapsed in 2009.
The Irish government gave holders of similarly ranked
instruments of its banks the choice of accepting a buyback at a
fraction of face value or being wiped out.
Bolster Capital
The takeover of SNS, the fourth-biggest Dutch lender and
designated by the government as too big to fail, is costing
taxpayers 3.7 billion euros in write-offs and capital
injections, as well as loans and guarantees of 6.1 billion
euros. The bank, which acquired ABN Amro Holding NV’s property-
finance unit in 2006, has been hurt by losses on real estate
loans that left it struggling to bolster capital and repay an
earlier government bailout before a deadline.
“People were shocked by how quickly it came to
nationalization, which wasn’t viewed as an immediate threat,”
said Simon Adamson, an analyst at CreditSights Inc. in London.
“The losses at SNS will probably turn out to be bigger than
anticipated, otherwise a capital injection with a bond buyback
and a restructuring might have been enough.”
The Netherlands gave bondholders 10 days to appeal against
their treatment. There’s likely to be zero repayment if the
government claims SNS would have gone bankrupt without its
intervention, said Adamson.
“European governments are still unwilling to force losses
on senior bondholders,” he said. “But we all know which way
things are heading.”
2013-02-06 00:01:00.6 GMT
The Dutch government’s unprecedented expropriation of SNS Reaal NV’s subordinated debt is igniting
investor concern that European regulators will impose losses on
senior bondholders in other failed banks.
About 900 million euros ($1.2 billion) of the Utrecht,
Netherlands-based lender’s debt securities were taken when it
was nationalized last week. That’s the first time European
authorities have immediately wiped out holders of dated
subordinated bonds of a bailed-out bank, according to data
compiled by Bloomberg.
Germany, the Netherlands and Finland want to accelerate
European Union plans to force losses on senior bondholders of
failing banks, three government officials said yesterday.
Investors are now watching Banca Monte dei Paschi di Siena SpA,
which asked the Italian government for a second bailout. The
cost to protect against losses from the Siena-based lender’s
senior bonds rose 30 percent to a four-month high of 606 basis
points in the past week, data compiled by Bloomberg show.
“There’s an evolution going on that is eventually going to
involve senior debt,” said Steve Hussey, a credit analyst in
London at AllianceBernstein Ltd., which manages $430 billion.
“It was quite shocking that subordinated debt was written off
with zero recovery as a way of sharing the pain.”
Mandatory Coupons
Before the financial crisis, investors viewed the type of
dated subordinated debt seized by the Netherlands as equivalent
to senior bonds, except in a default, because the securities had
mandatory coupon payments protected by an issuer’s layer of
capital. Bank collapses since the credit crisis are spurring
regulators to find ways of imposing losses on bondholders, even
as they bail out the lenders.
Regulators, meeting through the Bank for International
Settlements, are calling for measures to be in place from 2018.
Germany, the Netherlands and Finland, three of the AAA
rated states in the 17-nation euro area, called last week for
regulators to gain so-called bail-in powers, said three
government officials, who asked not to be named because the
talks are private.
While governments have impaired the capital securities of
lenders in previous rescues, the outright transfer of ownership
of the SNS dated subordinated bonds is “unprecedented, at least
in Europe,” said Nick Hill, an analyst at Moody’s Investors
Service in Paris.
Financial Strength
SNS’s senior rating was cut to Ba2, two levels below
investment grade, by Moody’s on Jan. 31 and the firm said it may
downgrade the bank again. On Feb. 4, the New York-based company
reduced SNS’s dated subordinated debt rating to C, the lowest
junk grade, from Caa3 after the nationalization. Standard &
Poor’s grades SNS’s senior debt at BBB-, the lowest investment
grade.
Dutch Finance Minister Jeroen Dijsselbloem told Parliament
Feb. 1 all debt of European banks, including senior notes,
should be available to cushion losses. The Netherlands’ central
bank warned against the move this time because it risks curbing
funding to the nation’s other lenders and because the government
didn’t want to pre-empt the BIS-led talks, he said.
“It’s a relatively aggressive rhetoric that the Dutch
government is using,” said Hill at Moody’s. “Given the finance
minister’s role as president of the Eurogroup of finance
ministers, that’s something that may have broader
implications.”
Bank Debt
The cost of insuring against losses on senior bank debt
rose after the SNS nationalization was announced. The Markit
iTraxx Financial Index of credit-default swaps on the senior
debt of 25 European banks and insurers has since climbed nine
basis points to 155 basis points.
Imposing partial losses on subordinated debt in bank
failures isn’t new. The U.K. changed the law to turn Bradford &
Bingley Plc’s dated notes with mandatory coupons into undated
securities with optional interest payments when the property
lender collapsed in 2009.
The Irish government gave holders of similarly ranked
instruments of its banks the choice of accepting a buyback at a
fraction of face value or being wiped out.
Bolster Capital
The takeover of SNS, the fourth-biggest Dutch lender and
designated by the government as too big to fail, is costing
taxpayers 3.7 billion euros in write-offs and capital
injections, as well as loans and guarantees of 6.1 billion
euros. The bank, which acquired ABN Amro Holding NV’s property-
finance unit in 2006, has been hurt by losses on real estate
loans that left it struggling to bolster capital and repay an
earlier government bailout before a deadline.
“People were shocked by how quickly it came to
nationalization, which wasn’t viewed as an immediate threat,”
said Simon Adamson, an analyst at CreditSights Inc. in London.
“The losses at SNS will probably turn out to be bigger than
anticipated, otherwise a capital injection with a bond buyback
and a restructuring might have been enough.”
The Netherlands gave bondholders 10 days to appeal against
their treatment. There’s likely to be zero repayment if the
government claims SNS would have gone bankrupt without its
intervention, said Adamson.
“European governments are still unwilling to force losses
on senior bondholders,” he said. “But we all know which way
things are heading.”
