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07 Feb 2013 10:52 AM
Dutch SNS Subdebt Bail-in Not Yet the Benchmark
Fitch Ratings-London-07 February 2013: The expropriation and apparent full loss of value of SNS Bank dated subordinated debt in the nationalisation of SNS REAAL by the Dutch state is the harshest burden-sharing on this asset class at a rated bank since the onset of the eurozone crisis, Fitch Ratings says. This high loss rate is not consistent with our "base case" loss severity notching for subordinated debt. But it is too early to conclude that such loss rates will become the norm over the longer term.
The SNS bail-in highlighted the role of subordinated debt as gone-concern capital. It was consistent with our view that sovereign support cannot be sufficiently relied upon to flow through to most bank hybrids and subordinated securities. Our starting assumption is therefore to notch these securities down from a bank's Viability Rating, which does not incorporate the potential for extraordinary sovereign support.
Our base case when assessing loss severity for junior debt is one notch down for subordinated debt and two notches for more junior hybrids. Notching subordinated debt down once already assumes relatively poor recoveries (10%-30%).
The expropriation and apparent full loss of value of SNS Bank subordinated debt would be consistent with loss severity notching of two notches, not one. Although the subordinated bondholders are entitled to claim for compensation, in practice recoveries could remain nil, if statements made by Dutch finance minister, Jeroen Dijsselbloem, that their claims entirely lose their value, hold. In jurisdictions (or even for individual banks) where we consider such high loss rates to be the new norm or base case, we would notch subordinated debt twice for loss severity instead of once.
The SNS case illustrated the sweeping powers authorities are likely to have as the bank resolution agenda develops in the EU. Even so, we think the way in which SNS was resolved, particularly the injection of considerable taxpayer funds and the full bail-out of all senior creditors, is not the blueprint the Dutch or other EU authorities ultimately have in mind for bank resolution. It also illustrated the inherent tension in bank resolution between the desire to push losses onto senior creditors, rather than taxpayers, if necessary, and the practicality of so doing without triggering unacceptable contagion risk.
If progress with resolution regimes is ultimately successful in overwhelmingly passing the cost of bank resolution onto shareholders and creditors rather than taxpayers, expropriation risk, including of subordinated creditors, should be less likely.
Instead, bank resolution may end up looking more like restructuring in the corporate sector, with subordinated creditors suffering write-down or equity conversion, but not necessarily full write-off or loss of value. Although loss rates ought always to be a function of the size of the problem at an individual bank, the larger the slice of junior debt that can be bailed in (whether non-equity Tier 1 capital, contingent convertibles or vanilla subordinated debt), the lower the risk of such high subordinated debt loss rates as seem probable with SNS.
Fitch rates some hybrid Tier 1 debt of SNS Bank at the lowest debt rating of 'C', reflecting poor recovery prospects, but does not rate its subordinated debt.
