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July 14 (Bloomberg) -- UniCredit SpA’s 500 million-euro
($635 million) hybrid bond issue includes features that
regulators said they no longer want in bank capital securities,
signalling rules being discussed today may be watered down,
according to CreditSights Inc.
Italy’s biggest lender priced the so-called Tier 1 undated
notes to yield 9.375 percent, according to a banker involved in
the transaction, who declined to be identified before the sale
is completed. If Milan-based UniCredit chooses not to redeem the
notes after 10 years it must pay an increased interest rate
known as a step-up, the sale prospectus shows.
Regulators said in December that bonds with step-up
interest should no longer qualify as bank capital, or debt that
fails before other securities and thus soaks up losses. The
Basel Committee on Banking Supervision is meeting today to
decide new rules on what will count as capital after lenders’
protection was shown to be inadequate by the worst financial
crisis in 70 years.
“Either UniCredit are taking a risk and just hoping
they’ll be able to include these in Tier 1, or they’ve got the
nod from the Bank of Italy,” said John Raymond, an analyst at
CreditSights in London. “National regulators always had an
element of discretion and that may continue more than people
think.”
The notes comply with current regulations and “envisaged”
new rules, according to a Rome-based spokeswoman for UniCredit.
Fixed Interest
UniCredit’s new Tier 1 notes pay a fixed rate of interest,
with the issuer having the option of calling the securities
after 10 years, according to the deal prospectus. Failure to
exercise the call resets the coupon to a higher floating rate.
Interest on the bonds won’t be paid if UniCredit has no
profit to distribute, according to the prospectus. If there’s a
loss and UniCredit finds itself short of capital, or if its Tier
1 ratio slips below 6 percent, the value of the notes will be
reduced to allow the bank to meet regulatory needs. The value of
the bonds will be written back up once the issuer returns to
profit, the prospectus shows.
Credit Suisse Group AG and JPMorgan Chase & Co. are
managing the bond sale with UniCredit.
The new regulations on risk taking and capital, known as
the Basel III rules, will attempt to fix shortcomings of the so-
called Basel II accord, which was initiated by lenders in the
late 1990s and lowered capital requirements by as much as 29
percent for some banks.
Absorbing Losses
The aim is to ensure banks won’t drag down economies or
force taxpayers to bail them out by insisting they hold more
capital that’s better able to absorb losses. The Basel committee
may publish the study later this month or in August, according
to a person with knowledge of the matter.
Under Basel III, “bank debt capital is going to have a
significant amount of loss absorption in it,” said Paul Owens,
who helps manage the equivalent of about $1.8 billion as a
credit analyst at Liontrust Investment Services Ltd. in London.
Buyers of Tier 1 bonds get paid after other debt investors
and before equity investors. Bonds are a cheaper form of capital
for banks to issue than stock because they pay interest from
pre-tax rather than after-tax earnings.
Banks have lobbied to dilute the new capital regulations,
arguing that it will hurt their profit and stifle their ability
to lend money.
“Return on equity and cost of capital are going to suffer,
there’s no doubt about it,” said Bryn Jones, who manages the
about $55 million at Rathbone Unit Trust Management Ltd. in
London.
($635 million) hybrid bond issue includes features that
regulators said they no longer want in bank capital securities,
signalling rules being discussed today may be watered down,
according to CreditSights Inc.
Italy’s biggest lender priced the so-called Tier 1 undated
notes to yield 9.375 percent, according to a banker involved in
the transaction, who declined to be identified before the sale
is completed. If Milan-based UniCredit chooses not to redeem the
notes after 10 years it must pay an increased interest rate
known as a step-up, the sale prospectus shows.
Regulators said in December that bonds with step-up
interest should no longer qualify as bank capital, or debt that
fails before other securities and thus soaks up losses. The
Basel Committee on Banking Supervision is meeting today to
decide new rules on what will count as capital after lenders’
protection was shown to be inadequate by the worst financial
crisis in 70 years.
“Either UniCredit are taking a risk and just hoping
they’ll be able to include these in Tier 1, or they’ve got the
nod from the Bank of Italy,” said John Raymond, an analyst at
CreditSights in London. “National regulators always had an
element of discretion and that may continue more than people
think.”
The notes comply with current regulations and “envisaged”
new rules, according to a Rome-based spokeswoman for UniCredit.
Fixed Interest
UniCredit’s new Tier 1 notes pay a fixed rate of interest,
with the issuer having the option of calling the securities
after 10 years, according to the deal prospectus. Failure to
exercise the call resets the coupon to a higher floating rate.
Interest on the bonds won’t be paid if UniCredit has no
profit to distribute, according to the prospectus. If there’s a
loss and UniCredit finds itself short of capital, or if its Tier
1 ratio slips below 6 percent, the value of the notes will be
reduced to allow the bank to meet regulatory needs. The value of
the bonds will be written back up once the issuer returns to
profit, the prospectus shows.
Credit Suisse Group AG and JPMorgan Chase & Co. are
managing the bond sale with UniCredit.
The new regulations on risk taking and capital, known as
the Basel III rules, will attempt to fix shortcomings of the so-
called Basel II accord, which was initiated by lenders in the
late 1990s and lowered capital requirements by as much as 29
percent for some banks.
Absorbing Losses
The aim is to ensure banks won’t drag down economies or
force taxpayers to bail them out by insisting they hold more
capital that’s better able to absorb losses. The Basel committee
may publish the study later this month or in August, according
to a person with knowledge of the matter.
Under Basel III, “bank debt capital is going to have a
significant amount of loss absorption in it,” said Paul Owens,
who helps manage the equivalent of about $1.8 billion as a
credit analyst at Liontrust Investment Services Ltd. in London.
Buyers of Tier 1 bonds get paid after other debt investors
and before equity investors. Bonds are a cheaper form of capital
for banks to issue than stock because they pay interest from
pre-tax rather than after-tax earnings.
Banks have lobbied to dilute the new capital regulations,
arguing that it will hurt their profit and stifle their ability
to lend money.
“Return on equity and cost of capital are going to suffer,
there’s no doubt about it,” said Bryn Jones, who manages the
about $55 million at Rathbone Unit Trust Management Ltd. in
London.
