Upfront
OPINION^ INTERNATIONAL FINANCING REVIEWHybrid warfare
T
he collapse in bond yields means the European
CORPORATEûHYBRIDûMARKETûISûCLOSEûTOûWITNESSINGûITSûlRSTû
sub-1% new issue. Yes, that’s corporate hybrids – an asset
CLASSûSPECIlCALLYûDESIGNEDûTOûBEûRISKYûENOUGHûTOûPAYûAû
decent return.
Last week, German utility EnBW priced two €500m
tranches at record lows, with a 60-year non-call 5.25-year
printing at 1.125% and a 60-year non-call eight-year at
1.625%.
With issuers able to get such attractive funding, will
investors in the corporate hybrid market one day face the
same problem as some of their counterparts in the bank AT
sector: issuers not calling their bonds.
In the bank market, Santander’s decision not to call an AT
in February caused plenty of controversy. While the broader
market appeared to shrug off the decision quickly enough,
every bank that has an upcoming call date is now being
scrutinised by investors.
If others start following Santander’s lead, the market may
not be as relaxed.
As for EnBW, given it was able to price its hybrids at such
low yields, what incentive will it have to call the bonds when
they come due?
The terms of the non-call 5.25-year notes mean the coupon
RESETSûTOûTHEûlVE
YEARûEUROûMID
SWAPûRATEûPLUSûTHEûINITIALû
credit spread if the paper isn’t called on August 5 2024. It
THENûRESETSûEVERYûlVEûYEARSûTHEREAFTER
While it’s impossible to know where the swap rate will be
by 2024, it doesn’t take a pessimist to believe that it will
probably still be at a very low level.
There are also step-ups in case EnBW doesn’t call but an
initial one doesn’t kick in until 2029 – and for the non-call
eight-year it’s even later.
All of which must cast doubt about how likely it is that
EnBW will exercise its option – and it is an option, not an
obligation – though the equity treatment by rating agencies
AFTERûTHEûlRSTûCALLûDATEûMAYûALSOûHAVEûAûBEARINGûONûTHEû
decision.
Investors might think this is all a worry for another day.
But they should consider what trouble they are storing up for
the future.
Talkin’ ’bout a resolution
F
or the fourth time in three years, the Italian government
has managed to sidestep European Union rules meant to
stop public money from being used to bail out failing banks.
As part of a €900m bailout of Genoese lender Banca Carige,
the government has managed, via the use of a deposit
guarantee fund and two banks controlled by the state, to cobble
together cash that wasn’t available to the bank privately.
The state-orchestrated bailout follows three rescues in
2016 that saw Banca Popolare di Vicenza, Veneto Banca and
Banca Monte dei Paschi di Siena saved from collapse – each
with the direct or implicit help of the government.
While none of these rescues involved the government
directly injecting equity into a failing bank, as in the case of
RBS, ABN AMRO, Bankia or countless others during the crisis,
INûEACHûCASEûTHEûGOVERNMENTûHADûTOûlNDûAûCREATIVEûWAYûOFû
stepping in because there was no alternative.
)TûWASNTûMEANTûTOûBEûTHISûWAYû)TûISûNOWûlVEûYEARSûSINCEûTHEû
Bank Recovery and Resolution Directive was passed into law.
)TûCREATEDûSPECIlCûREQUIREMENTSûFORûBANKSûTOûBUILDûUPûCAPITALû
cushions, and relatively clear rules on how private investors
and creditors were to be bailed in.
"UTûDESPITEûlVEûYEARSûHAVINGûPASSED û%UROPEûISûSTILLûATûAû
halfway house when it comes to the BRRD. Banks won’t have
to fully comply until 2024. In the cases of Carige and its three
domestic peers, there simply wasn’t a cushion to be bailed in.
Given the economic and political backdrop, it isn’t beyond
the realms of possibility that, between now and 2024, there
may well be yet another European banking crisis. While
much work has been done, it is highly likely that it will prove
INSUFlCIENTûWHENûTHEûTIMEûCOMES
It is perhaps too late now to accelerate the timetable,
forcing banks to issue bail-inable debt quicker. But other
tweaks can be done. For one, the Single Resolution Board
COULDûBEûSTRENGTHENEDûWITHûADDITIONALûlNANCIALûRESOURCESû
and new powers to bring together the sprawling and
dysfunctional regulatory landscape.
That will require a certain amount of owning up to
previous mistakes, which will be hard. Fortunately, a new
%UROPEANû#OMMISSIONûISûSETûTOûTAKEûOFlCEûINûTHEûNEXTûFEWû
weeks. That could be the ideal time to breathe new life into
the BRRD before the next crisis inevitably hits.