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In campana "la musica" potrebbe cambiare "in tutta Europa" 
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By Helene Durand LONDON, Sept 30 (IFR) -
Holders of subordinated bank debt issued by European banks could be in authorities' firing line if governments are forced to inject capital into the banks, market participants warned this week.
While financial indices rallied on suggestions that governments were getting closer to shoring up banks' balance sheets, a repeat of 2008-2009 where bond holders escaped largely unscathed is unlikely.
"I hope this rally is not another dead-cat bounce but the reason why I am yet to be convinced is because the rally we are seeing is on the back of the rumour that there may be state intervention in the banks," said Andy Young, head of FIG syndicate at Credit Suisse.
"It is a sign of how distressed certain asset prices have got that we have seen a rally on the back of news that the state may intervene.
While bank recapitalisation may be necessary, for bank capital investors, it's fraught with danger."
He added that any potential state injection would be difficult to reconcile with bondholders not experiencing any type of burden-sharing, given the rhetoric from regulators across the globe since 2008. "Going forward, Ireland will look like a gift-horse," Young said.
"They gave Irish banks' tier-one holders 20 cents to the dollar and that's unlikely to happen again."
Another head of FIG syndicate echoed this view.
"No one knows what form any state injection may take. Would it be preference shares, would it be equity, would it be hybrid tier one? Who knows," he said.
"There is no certainty as to where [a bondholder] might end up in the pecking order and given the discussions on bail-ins and burden-sharing generally, it's difficult for investors to commit in size to the asset-class and not a surprise that they are keener than ever to buy securities with assets backing them.
" THIS TIME IT WILL BE DIFFERENT While Markit's senior and subordinated indices rallied over the past week, the sub index lagged behind and was 13% tighter over the week versus just under 20% for the senior index.
Bondholders by and large benefited from the government injections in 2008 and 2009 and authorities were only able to enforce burden-sharing in limited cases, mainly through the imposition of restrictions on coupon payments or through preventing issuers from calling outstanding deals.
However, regulators have spent the last three years trying to make sure that it does not happen again and that coupon write-downs and real loss-absorption is possible in future.
"What a capital injection does in terms of potential coupon payments is a big debating point," said the head of FIG syndicate.
"If we see individual intervention, it would support a coupon suspension."
Already, various resolution regimes have been introduced in Germany, the UK, Ireland and Denmark.
In the case of the latter, there have been two examples of bondholders being bailed-in. Meanwhile, the European Commission is set to release proposals for a Europe-wide bail-in framework in mid-November.
A draft obtained by Reuters earlier this month makes it very clear what regulators are trying to achieve.
"Members states should ensure that additional Tier 1 and Tier 2 instruments that are recognised as regulatory capital fully absorb losses at the point of non-viability of the issuing institutions before taxpayers are exposed to loss," the draft says.
"Accordingly, resolution authorities should be required at that point to write down those instruments in full or convert them to equity, before any other resolution action is taken.
Such write-down or conversion should also be carried out before any public sector injection of capital, or equivalent extraordinary public financial support, to an institution, where the institution would become non-viable without such financial support.
:By Helene Durand LONDON, Sept 30 (IFR) -
Holders of subordinated bank debt issued by European banks could be in authorities' firing line if governments are forced to inject capital into the banks, market participants warned this week.
While financial indices rallied on suggestions that governments were getting closer to shoring up banks' balance sheets, a repeat of 2008-2009 where bond holders escaped largely unscathed is unlikely.
"I hope this rally is not another dead-cat bounce but the reason why I am yet to be convinced is because the rally we are seeing is on the back of the rumour that there may be state intervention in the banks," said Andy Young, head of FIG syndicate at Credit Suisse.
"It is a sign of how distressed certain asset prices have got that we have seen a rally on the back of news that the state may intervene.
While bank recapitalisation may be necessary, for bank capital investors, it's fraught with danger."
He added that any potential state injection would be difficult to reconcile with bondholders not experiencing any type of burden-sharing, given the rhetoric from regulators across the globe since 2008. "Going forward, Ireland will look like a gift-horse," Young said.
"They gave Irish banks' tier-one holders 20 cents to the dollar and that's unlikely to happen again."
Another head of FIG syndicate echoed this view.
"No one knows what form any state injection may take. Would it be preference shares, would it be equity, would it be hybrid tier one? Who knows," he said.
"There is no certainty as to where [a bondholder] might end up in the pecking order and given the discussions on bail-ins and burden-sharing generally, it's difficult for investors to commit in size to the asset-class and not a surprise that they are keener than ever to buy securities with assets backing them.
" THIS TIME IT WILL BE DIFFERENT While Markit's senior and subordinated indices rallied over the past week, the sub index lagged behind and was 13% tighter over the week versus just under 20% for the senior index.
Bondholders by and large benefited from the government injections in 2008 and 2009 and authorities were only able to enforce burden-sharing in limited cases, mainly through the imposition of restrictions on coupon payments or through preventing issuers from calling outstanding deals.
However, regulators have spent the last three years trying to make sure that it does not happen again and that coupon write-downs and real loss-absorption is possible in future.
"What a capital injection does in terms of potential coupon payments is a big debating point," said the head of FIG syndicate.
"If we see individual intervention, it would support a coupon suspension."
Already, various resolution regimes have been introduced in Germany, the UK, Ireland and Denmark.
In the case of the latter, there have been two examples of bondholders being bailed-in. Meanwhile, the European Commission is set to release proposals for a Europe-wide bail-in framework in mid-November.
A draft obtained by Reuters earlier this month makes it very clear what regulators are trying to achieve.
"Members states should ensure that additional Tier 1 and Tier 2 instruments that are recognised as regulatory capital fully absorb losses at the point of non-viability of the issuing institutions before taxpayers are exposed to loss," the draft says.
"Accordingly, resolution authorities should be required at that point to write down those instruments in full or convert them to equity, before any other resolution action is taken.
Such write-down or conversion should also be carried out before any public sector injection of capital, or equivalent extraordinary public financial support, to an institution, where the institution would become non-viable without such financial support.
