IFR International - 03.11.2018

ANZ and HSBC are arranging the
roadshow.

YEN

UBS CATCHES UP WITH JAPAN FANS

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a long time in the making.
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groundwork for the new deal.

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which can be sold off the banks’ MTN

programmes. The traditional Samurai

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comfortable with the format.

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from specialised banks in particular. The

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shinkin banks.

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across the two tranches (the leads were not

RT1 loses out in UK shake-up of capital

tax treatment

„ FINANCIALS HMRC proposal benefits corporates but could hamper insurers

An HMRC proposal to level the taxation playing

field between corporates’ and financials’ hybrid

capital instruments was broadly welcomed

by bankers, despite the potentially negative

ramifications for some insurance RT1 bonds.

HMRC announced changes last Monday that

effectively mean coupon payments on corporate

perpetual hybrids will become tax-deductible,

aligning them with Additional Tier 1 and

Restricted Tier 1.

The government body’s stance is at odds with

lawmakers in Sweden and the Netherlands,

where political currents have led to the removal

of tax deductibility for bank and insurance

hybrids, putting those institutions at a

disadvantage to their European peers.

“They removed the tax deductibility for AT1

in the Netherlands to align corporates and

financials, which frankly I think is an utterly

bizarre interpretation of state aid,” a hybrid

banker said.

“This is a move by the UK to address it in a

better way. But the original framework was a

pretty good one: it covered almost every angle

you’d want to have, and by moving to this

framework it will be slightly narrower - so it will

be effective in some respects, and not so much

in others.”

And indeed, while HMRC appeared to level the

playing field between corporates and financials

when it comes to tax deductibility, some of the

changes to the current framework could have

repercussions for other parts of the market.

This became apparent when the Prudential

Regulation Authority published a consultation

paper in direct response to the HMRC changes

last Wednesday.

The UK regulator expressed concern that,

as a consequence of the changes, insurance

companies could end up overstating their stack

of loss-absorbing debt.

Until now, financial institutions have been

exempt from the taxation on gains when an

instrument is written down, should that create

a profit.

The PRA now wants insurers to deduct the

maximum tax charge generated on writedown,

imposing a haircut on the capital recognition

of RT1 with writedown features and effectively

making it less cost-efficient. It argues that firms

will not overstate their solvency position as a

result.

This change would apply to all new RT1

issuance from January 31 2019. The implications

for writedown RT1s that have already been

issued - namely Phoenix and Rothesay - will be

decided on an individual basis.

ONE-SIDED?

Equity conversion RT1 would not be impacted.

There would also be an exemption from taxation

in cases where failure to write down RT1 bonds

would result in a collapse of confidence in the

institution within 12 months. However, the PRA

points out that mandatory RT1 triggers are set at

a level that makes this unlikely.

The proposed treatment of writedown RT1

puts it at odds with the banking sector. Lenders

on the continent have persuaded regulators

that it is inconceivable they would breach the

AT1 trigger without suffering significant losses,

shielding the gain from tax.

It is unclear yet whether the PRA may try

to take a similar approach towards AT1 with

writedown features given that in theory at least,

it is also going-concern capital.

“In fairness to the PRA, it’s different with insurers

as you can have a trigger event without having a

ton of losses necessarily; there’s a bit more volatility

there than banks,” the hybrid banker said.

“But nonetheless, they’re taking a more

conservative view than EIOPA, which tried to be

constructive on that point.”

STATUS QUO

While the HMRC changes could have

repercussions for writedown insurance RT1

bonds, there was some helpful clarification for

other types of financial debt.

HMRC does not include Tier 2, non-preferred

senior and holdco senior in its hybrid capital

definition, it told IFR, but coupons on those

instruments are deductible under its normal rules.

It confirmed that contractual writedown and

conversion, as must be included in the language

of internal MREL instruments, should not cause

coupons to be recharacterised as distributions,

removing tax uncertainty in that instance too.

Alice Gledhill