Fresh from the LSE — a bombshell for the British bond market, courtesy of the FSA and the European Commission:
In the context of ongoing discussions between the UK Government and European Commission about the RBS restructuring plan and the Commission’s recent communication on restructuring, which states that, where possible, banks subject to restructuring under State aid rules should not use this aid to remunerate their own equity and subordinated debt, the FSA has objected to RBS calling at this time the following four subordinated debt instruments with call-dates in October 2009:
National Westminster Bank plc securities: Upper Tier 2 securities, EUR 400m, callable 5 October
National Westminster Bank plc securities: Upper Tier 2 securities, EUR 100m, callable 5 October
Royal Bank of Scotland plc securities: Lower Tier 2 securities, AUD 590m, callable 28 October
Royal Bank of Scotland plc securities: Lower Tier 2 securities, AUD 410m, callable 28 October
RBS is therefore not calling these subordinated debt instruments, consistent with their terms and conditions. Further, future decisions on whether or not to call capital instruments will be subject to consultation with the same parties, as well as circumstances (economic or other) prevailing at the time, pending the European Commission’s decision on RBS’s restructuring plan.
RBS has become the first British bank to not call some of its subordinated, or hybrid, bonds — in this case upper and lower Tier 2 instruments, which help make up some its regulatory capital. The risk of non-calls and non-payment of coupons (Northern Rock announced a payment deferral last month) has been bandied about for some time — given the EC”s determination to force bondholders to share some of the cost of state bail-outs of banks.
So much for non-call/non-payment `risk.’
Update: Here’s some comment from Monument Securities’ Marc Ostwald:
The big surprise is that the Lower Tier II were not called.
Initial mark down on the Upper Tier II is 20 points. Clearly impacts all financials where there is govt involvement, most obviously Lloyds, but the fear factor could well leave equivalent Barclays and HSBC suffering a knock-on effect, after all the regulator can easily pose the question: “why are you repaying cheap capital?” to any institution, not just Lloyds & RBS, and if this happens in the UK, then one has to have fears for the rest of the EU banks.
All in all this fits with what we were saying yesterday about the potential for a resurgence of fears about the health of the financial sector.