IFR Editor-at-large Keith Mullin
“EUROPE AND BANKS are the two worst places you can be right now,” according to Stefano Marsaglia, chairman of Barclays Capital’s global FIG group. Perfect timing, then, for IFR’s 11th annual Bank Capital Conference, which took place in London on November 24, with the tag-line: “New Capital Structuring and Liability Management in 2012”.
I’ve been chairing this event off and on for years now and it’s always a great opportunity to catch up with the capital structuring community. This year, as in previous years, the room was packed and it was a great way of getting up to speed with the myriad issues around the key theme of bank capital: how much will be needed, how much it’ll cost, how it’ll be structured and who’ll buy it.
It always helps to have an issue that gets the blood pumping to raise the level of theatre. This year, we had the issue of Santander’s (ultimately poorly subscribed) liability management exercise. It was clear this had truly upset investors and the level of emotion expressed should serve as a lesson for issuers as the pendulum tentatively swings towards issuer-friendly structures.
EVEN THE COERCIVE LMEs done after the financial crisis at least tried to leave investors NPV neutral, it was pointed out. Buying back sub debt at a discount and replacing it – as Santander did – with something that will never trade up to par in the eyes of investors was widely seen as an aggressive and predatory move. The comments about Santander were so sensational that I thought I’d lay some of out here, as a lesson for issuers and dealer-managers.
Neil Williamson at Aberdeen Asset Management: “I’m unsure of what Santander was signalling with the LME, given they raised a meaningless amount of capital … You could conclude they’re in trouble and were trying to do something to get out of trouble but didn’t want to signal they were in extreme trouble by doing something even bigger. It’s a negative signal because it was so pointless … When they come to do new issuance, they’ve lost a lot of buyers, so it’s not going to go very well.”
It always helps to have an issue that gets the blood pumping to raise the level of theatre
Georg Grodski, Legal & General: “They’re inadvertently messaging that they’re in a really bad state. They’ve pointed our attention and that of many other investors to the fact that the once mighty and ultra-clever Santander is at the end of its tether.
“That’s very worrying. It’s too big to be bailed out by the Spanish government so you can’t help but run some adverse scenarios for the bank… The cat is out of the bag. They can’t possibly uphold the fairly self-confident, if not arrogant stance they had in the past. The message clearly is they’re very worried about things getting worse, they’ve run out of options and are up against the wall.”
In terms of what he wants to see happen now: “It smells like there’s an event around the corner, maybe a profit warning, or an expensive restructuring. I would want to wait until some kind of event is out of the way and I can look at them as a new Santander trimmed down in size which has done a lot about recognising asset quality and has done something about its costs. A comprehensive overhaul possibly accompanied by some sort of management change might afford me the possibility of giving them the benefit of the doubt again.”
Roger Doig, Schroders: “It signals there’s a problem. Last time, we had liability management after banks were bailed out. Now we’re seeing it before they’re ostensibly in trouble. It’s pretty unlikely now that Santander will be able to do any senior unsecured issuance or possibly covered bonds.”
GIVEN THE DREADFULLY gloomy market backdrop, I was pleasantly surprised – and mightily relieved – that neither the dreadful state of the European sovereign debt market nor stories about the break-up of the euro unduly dominated proceedings.
The lack of regulatory clarity about bank capital instruments was more of a focus. Putting final touches to directives that will ultimately define the shape of regulatory capital instruments in the midst of a sovereign crisis and ahead of economic recession is far from ideal, but the various EU rulebooks are slowly wending their way to some form of conclusion.
The publication of the EBA term sheet on contingent capital, widely expected to draw on work already done by the Basel Committee, is eagerly awaited. The emergence of CoCos as a new asset class does seem more sure-footed, now that the Financial Stability Board is supportive of the concept.
That said, I’m not sure I agree fully with those who say a thriving market for CoCos will emerge quickly. There certainly won’t be a uniform format, given (as one delegate pointed out) different legal frameworks, and insolvency and tax regimes throughout Europe.
Market participants point nonetheless to significant interest in the instrument from private banking/high net worth individuals, hedge funds, and convertible buyers. Senior and investment-grade debt buyers are unlikely to be anchor buyers of the product, and it’s not clear whether the other classes of investor will enter in sufficient magnitude to compensate.
I sense a bit of wishful thinking around CoCos, maybe given added impetus because 5.125%-trigger Alternative Tier 1 (AT1) instruments are widely seen as being un-issuable in some jurisdictions (such as the UK), and un-investible by institutional fixed-income funds managers, who aren’t minded to offer optionality to issuers and who will always look to dated must-pay instruments.
