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Monday, 23 October 2017

Italy adds to patchwork approach on senior debt

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Italy is the latest country to put a new twist on European Union legislation on how to deal with troubled banks, leaving investors increasingly unsure of their standing when they purchase senior bank debt.

According to a CreditSights note, while the country adopted the EU-wide Bank Recovery and Resolution Directive in July, a draft decree has been put through a parliamentary consultation process which will rank corporate deposits ahead of senior.

While the proposals are similar in spirit to those put forward by the German legislator earlier this year which isolate senior unsecured as an easily identifiable and bail-inable layer of debt, it had its own twist.

“The Italian approach … elevates the ranking of large corporate customer deposits above the other senior claims,” CreditSights analysts wrote. “But that leaves a thicker tranche to absorb any senior bail-in losses equally, including interbank and derivatives liabilities along with senior unsecured debt securities.”

A banker said he expected the Italian proposal to have less of an impact that the German one.

“In Germany, senior is effectively crammed down,” he said. “In the case of Italy, senior is left where it is but corporate deposits get lifted up.

The CreditSights analysts echoed this view, saying that while the probability of loss would be as great at a bank with equivalent risk in Germany, the loss given default should be lower in Italy.

The impact on secondaries was difficult to read on Monday as the broader weaker market backdrop meant that it was difficult to separate the impact of the news and China going into free fall.

A €1.5bn 2019 bond for UniCredit was quoted just over 6.5bp wider than Friday. “It’s hard to see the underperformance give the cloud of noise we have in the market right now but this will likely be a concern over the medium term,” a head of FIG DCM said.

Frustration

This latest instalment in the legislative bail-in implementation saga has left bankers frustrated.

“It’s interesting to see that what Germany has done appears to set the tone for what is happening elsewhere but it’s still a very patchwork approach,” the DCM FIG head said.

“The outcome is not optimal and I wonder if the European legislator will want to optimise all these different regimes further down the line.”

One syndicate banker called it a “nightmare.”

“It totally changes the dynamic of what senior is, how can we have an integrated European senior market when you can’t compare apples for apples,” he said. “Thankfully there should be enough within each country so you can price deals off each other but comparables from different countries will go out of the window.”

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