Hybrid bonds’ structure dogs banks
By Jennifer Hughes in London and Vincent Boland in Milan
Published: February 11 2010 18:08 | Last updated: February 11 2010 18:08
Banks could face future funding problems if regulatory uncertainty over their hybrid bonds persists, bankers said after an Italian bank took the unusual step of not redeeming an existing hybrid security because it was unclear whether a replacement bond would be viewed as favourably by regulators.
This week,
UBI Banca of Italy became the first bank not to repay its hybrid on the first call date, due next month, because of this uncertainty.
Hybrids, which contain characteristics of both equity and debt, form a key part of banks’ regulatory capital.
But how their contribution to capital will be calculated in future is currently the subject of intense discussions among international regulators as part of the wider Basel Committee debate on how much capital banks must hold.
UBI Banca told the Financial Times that the bank had decided not to call the securities until it had a better understanding of what the new rules might be for capital held by banks.The bank has the possibility of calling the securities again after another three months, but has decided to retain them at this stage because of the uncertainty surrounding the regulatory issues.
The structure of future hybrids is expected to be significantly different from pre-crisis issues after most existing bonds did not help share the pain of losses, as had been expected, until regulators and politicians intervened to force banks to suspend or skip interest payments, or to not redeem the bonds.
This has left both bank treasurers and their regulators uneasy about new bonds because they do not know what features will be allowed – or how existing issues might be “grandfathered” into the new rules.
Prices on a range of existing hybrids have risen recently in expectation that the bonds will be allowed to count for only a short, set period that would encourage banks to redeem them for new paper.
“There could well be a situation where the normal issuance programmes of a number of banks are put on hold,” said Vinod Vasan, head of financial institutions debt capital markets at UBS.
A bottleneck would risk temporarily overwhelming the market, he cautioned.
“Once it’s clear what new instruments will be acceptable or when grandfathering is more certain, then we could well get a lot of issuance in a small space of time,” said Mr Vasan. “Hybrids are much less liquid than senior markets. It’s easy to overpower the markets with supply.”
Amir Hoveyda, head of European debt capital markets at Bank of America Merrill Lynch, said bankers were advising clients to be as ready as possible.
“Our advice to clients is to be prepared to access the markets as soon as there is certainty on these issues because this market has the potential to become very crowded very quickly,” he said.
