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Financial Commentary

1. Bank bondholders need rights like shareholders

   Apr 19, 2016 | Financial Times

   By Patrick Jenkins
   
   
   ... Bank bonds, it turned out, were counter-intuitively safer than normal corporate bonds. Apart from Lehman Brothers’, even the most junior debt issued by the world’s big banks was fully honoured — bar the occasional coupon suspension.

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Client Attorney Privileged/Attorney Work Product/At Request of Counsel

Financial Commentary

1. Bank bondholders need rights like shareholders

   Apr 19, 2016 | Financial Times

   By Patrick Jenkins

   When companies fail, shareholders get wiped out and outstanding losses are recouped from bondholders.

   Well, not always. It is an oft-ignored fact of the financial crisis that, even as taxpayers poured billions into the rescue of collapsing lenders from Royal Bank of Scotland to Citigroup, bondholders hardly lost a penny.

   Bank bonds, it turned out, were counter-intuitively safer than normal corporate bonds. Apart from Lehman Brothers’, even the most junior debt issued by the world’s big banks was fully honoured — bar the occasional coupon suspension.

   How times change. Now that regulators have shored up bank equity to two or three times the pre-crisis level, attention has turned to banks’ debt. And the shake-up is much more radical.

   In future, many bank bondholders will find their investment is at substantial risk — of conversion to equity, or of a “haircut” to its value, or of having its interest coupons eliminated. All of this is in the name of strengthening the balance sheet and ending the “too-big-to-fail” risk that put taxpayers on the hook in 2008. As policymakers like to say: out go the government “bailouts”; and in come the bondholder “bail-ins”.

   There have been a few isolated instances of bondholders being stung over the past few years — at SNS Reaal in the Netherlands and at Cyprus’s Laiki during that country’s crisis, for example. But the introduction in January of a new pan-European “bail-in” rule book — a foretaste of a worldwide initiative — has been messy.

   In Portugal, institutional investors were incensed when bondholdings in Novo Banco were wiped out with little notice. In Italy, a pensioner committed suicide after losing his life savings in a bond sold by the collapsed Banca Etruria. Investor confusion was all the greater because the authorities in Portugal and Italy imposed the losses on bondholders at the tail-end of last year, pre-empting the introduction of the EU rules.

   An “opinion” from the European Banking Authority on when losses on contingent convertible, or “coco”, bonds should be triggered further inflamed investor nervousness — against a backdrop of negative interest rates and a slowdown in China. It led to a plunge in the value of some bonds, issued by banks such as Deutsche Bank, which were perceived as having the thinnest capital buffers. In the first half of February, the index for coco debt fell nearly 8 per cent.

   Cocos have since recovered in value, and UBS last month broke a drought of issuance, selling $1.5bn-worth. But the brush with the new reality shocked investors.

   Some are now speaking out. These radical new risks in bank bonds should, they say, be matched with radical new bondholder rights. At a recent Financial Times conference in London, Keith Skeoch, chief executive of Standard Life, and Anne Richards, the incoming chief executive of M&G, made the same pitch: when bonds become “bail-inable”, investors should have the same kind of rights as shareholders...

   For full story: http://www.ft.com/intl/cms/s/0/8f55e288-055e-11e6-a70d-4e39ac32c284.html#axzz46FJy1c41

   
   

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