First it was Lloyds Banking Group and now it’s RBS.
Who’s next?
RBS Financing Limited (‘RBSF’), a wholly-owned subsidiary of The Royal Bank of Scotland Group plc (‘RBSG’ and, together with its subsidiaries, the ‘Group’), has today launched (1) invitations to holders of certain existing sterling Tier 1 and Upper Tier 2 securities of the Group to offer to exchange any or all of such securities for new senior unsecured notes of The Royal Bank of Scotland plc (the ‘Exchange Offers’) and (2) invitations to holders of certain euro and US dollar Tier 1 and Upper Tier 2 securities of the Group to tender any or all of such securities for purchase by RBSF for cash (the ‘Tender Offers’). The Exchange Offers are being made on the terms and subject to the conditions set out in an Exchange Offer Memorandum dated 26 March 2009 (the ‘Exchange Offer Memorandum’). The Tender Offers are being made on the terms and subject to the conditions set out in a Tender Offer Memorandum dated 26 March 2009 (the ‘Tender Offer Memorandum’).
Translated, that means RBS is offering holders of £5.75bn worth of subordinated debt a chance to exchange it for senior unsecured debt, at a discount of course.
The move follows a similar offer by Lloyds and, as Paul Davies explained in Thursday’s FT the aim is to strengthen core tier one capital.
By in effect buying the debt back at a discount, the bank will be able to treat the gains as retained earnings that can be added to its capital directly.
And investors are likely to take up the offer because junior bonds have been trading at very low levels along with much of the rest of the subordinated bank debt market.UK investors in junior bank debt face particular legal and political uncertainty since the recently passed Banking Bill gave the government powers to change the terms on such bonds. Bondholders at Bradford & Bingley have already been told that interest payments might be withheld in future. Previously that would have constituted a default.
But it is not just state controlled banks that would gain from buying back subordinated debt, as Jonathan Pierce of Credit Suisse noted this morning.
We also note that an increasing number of banks are repurchasing non-equity capital instruments creating tier 1 capital gains. Barclays has a not inconsiderable £34bn of non-equity capital. Indeed, while its equity tier 1 ratio is 3% lower than LBG and RBS we believe its total capital ratio is broadly equivalent. This provides it with further options to assist the equity tier 1 ratio.
Indeed, shares in Barclays are up 16.4p at 140p in late afternoon trading.
Update:
