Friday, 20 July 2018

Spain in starting blocks for 'TLAC bonds'

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French-style senior non-preferred bonds coming soon

Spain is close to approving the introduction of a new type of senior debt, meaning the country’s banks could build the loss-absorbing buffers demanded by regulators faster than expected.

“Spain has started the process to incorporate the senior non-preferred debt into its national law,” said a source.

“A draft act is being negotiated and … a legal document has already been prepared by the government.”

Like banks across Europe, Spanish lenders must boost their stacks of loss-absorbing debt to meet new rules shifting the burden of failing banks from the taxpayer to institutional investors.

The European Commission last year endorsed the approach adopted by France, which pioneered senior non-preferreds to allow its banks to start chipping away at their targets.

French lenders have steamed ahead with senior non-preferred issuance since the law was passed late last year, pricing €10.75bn in euros already in 2017.

Bail-in-able senior is on track to become the largest single sector of bank debt as more countries join the fray, with at least €500bn more expected in the coming years, according to a recent Morgan Stanley research note.

However, approval at the European level - once expected to be fast-tracked and voted on by July 2017 - has been delayed, leaving Spain and potentially other countries to push ahead in isolation.

The source said Spanish senior unsecured debt would be divided into two categories, preferred and non-preferred, providing legal cover for this instrument.

A second source confirmed that the law was in its final format and was sitting with the Ministry of Finance. Ministers meet every Friday to discuss such topics, but it is unclear whether it made it onto the most recent agenda given Banco Popular’s resolution and Catalonia’s newly announced independence referendum.

Santander, facing one of the largest TLAC issuance targets, pushed ahead with a senior non-preferred surrogate called second-ranking senior earlier this year, using contractual subordination. Others however, such as BBVA and CaixaBank, have so far been unable to issue debt in this format.

“I think the law could potentially be passed in June; discussions are in progress,” said a third source. “I’m sure that you’ll see Spanish issuance pretty soon after that.”


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