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SNS Reaal wipeout delivers wakeup call to Sub Debt market
06 February 2013 | By Aimee Donnellan
The Dutch government’s shock move to wipe out SNS Reaal junior bondholders has prompted a sharp widening in subordinated bank spreads which could ultimately make it more expensive for some banks to beef up capital buffers, bankers say.
Tier 1 and Lower Tier 2 SNS Reaal bonds sank close to zero and the widening in subordinated bank bond spreads accelerated, after the Dutch Finance Ministry said on Friday it was nationalising the bank and would expropriate a number of its securities.
SNS Reaal’s 11.25% perpetual callable in November 2019 and its 6.258% perpetual callable in July 2017 are now bid at less than 1 point on a price basis, according to Tradeweb.
Although a substantial haircut had been anticipated, a total wipeout of the sub debt came as a complete shock.
“The Irish banks’ coercive tenders were the previous worst outcome for sub debt holders, but we now know Lower Tier 2 debt is completely up for grabs. The recovery people will factor into sub debt is now zero,” said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.
The SNS subs had fallen 10 points to 35-45 when talk of a nationalisation first surfaced a couple of weeks ago - a tame decline, in hindsight, given their subsequent plummet.
“We had expected less drastic action before the government resorted to nationalisation,” said Simon Adamson, an analyst at independent research firm CreditSights.
“The market had also been expecting some form of liability management exercise, i.e. a tender offer, for the subordinated bonds, rather than expropriation.”
Haircuts of around 80%, as were imposed on Irish subordinated bank bonds back in 2010, were considered to be a more likely outcome. Some hedge funds are believed to have positioned for a similar coercive tender, and have been left badly burned having made the wrong bet.
Scary precedent
Experts now fear that the Netherlands has set a precedent, especially as the government has proved it is possible to change national laws on bank debt even before the EU resolution regime becomes effective in 2018.
Adamson said the move proved “the willingness of politicians and regulators to use their new powers to intervene.”
The market is already assessing which other bank bonds could be vulnerable. SNS rival ABN’s subs have come under pressure.
“Prior to this precedent the downside recovery for Lower Tier 2 was generally assumed to be 20%. This should now be 100%,” BNP Paribas credit strategists said.
This could put pressure on troubled lenders such as Bankia and other distressed Cajas, Monte dei Paschi, and HSH Nordbank, and as a result investors may be justified in demanding higher yields to buy their bonds.
Core threat
However, some analysts argued that subordinated bondholders in core European jurisdictions were most at risk, as peripheral countries are more nervous about destabilising their fragile banking sectors and the risk of contagion.
The Netherlands is one of only four eurozone countries -along with Germany, Finland and Luxembourg - still assigned the highest credit rating by all three major rating firms after a slew of downgrades during the bloc’s three-year-old debt crisis.
“Northern European regulators tend to take the capital structure very seriously,” said one hybrid capital banker.
“Tier 1 and Tier 2 is created as a buffer for situations just like this, and I think we are likely to see other regulators performing similar moves should they need to.”
Senior relief
The only comfort was that SNS Reaal senior bondholders were left untouched - hence the relative stability of senior spreads.
“The fact that they (Dutch government) chose not to explore haircutting the bank’s senior bondholders will provide some comfort to investors if it comes to other regulators looking at precedents in future,” said Rupert Carter, FI syndicate banker at Societe Generale.
The iTraxx Subordinated Financials index widened by 47bp over the past two weeks, while the spread to the Senior Financials Index moved out sharply to 115bp. Although that margin is still well below the wides of 209bp seen in May 2012, it is a long way from the 78bp tights from early January when investors grew more confident in the health of the financial sector and support from governments.
Denmark is so far the only country to have imposed loses on senior bondholders, but even then in 2011, a sharp sell-off prompted the government to retract bail-in language.
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