Cat XL
Shizuka Minamoto
UniCredit is being haunted by a ghost from its past. A UK-based hedge fund says the Italian lender should not be allowed to treat the proceeds from a decade-old issue of hybrid securities as equity. Chief Executive Jean Pierre Mustier might prefer to get rid of the expensive instruments. But it’s hard to extract UniCredit from the transaction without upsetting other investors.
Caius Capital on May 3 asked the European Banking Authority to investigate the capital treatment of 3 billion euros UniCredit pocketed from the sale of notes – known as CASHES – in 2009. The instruments mature in 2050 and can be converted into shares in the bank under certain conditions. It’s not the first time the transaction – part of a much-needed post-crisis cash call – has attracted unflattering publicity. Regulatory doubts about the capital treatment forced UniCredit to rejig the deal in 2011. Even so, it still contributes 2.4 billion euros towards the bank’s common equity Tier 1 (CET1) capital ratio, which stood at 13.06 percent at the end of March.
Caius says the cash – which adds an estimated 70 basis points to UniCredit’s CET1 ratio – should not be included. This is because of an agreement that links coupon payments on the CASHES to UniCredit’s decision whether or not to pay dividends on ordinary shares. More questionably, Caius also argues that the transaction invalidates UniCredit’s entire share capital.
The bank says that the transaction is kosher. Even so, Mustier might welcome the opportunity to save an estimated 130 million euros in annual payments due for the next three decades. This is more easily said than done, though. A forced conversion of the notes into UniCredit shares, which Caius proposes, can only be triggered if, for instance, the bank is insolvent or has nearly depleted its regulatory capital. In that scenario, holders of the CASHES would be largely wiped out, as the underlying shares are worth a mere 170 million euros at current prices. Investors would probably sue.
The uncertainty has nonetheless knocked the value of the notes, which now trade at 40 percent below their par value, despite offering annual payments of more than 4 percent. One option is to offer to redeem the notes at a discount. But investors may not wish to sell, and the capital benefit might evaporate. UniCredit may be stuck with its costly capital.
