There was something of a flurry this week in the world of European debt exchanges, when Austria’s Raiffeisen Bank – the second biggest lender to emerging Europe – pulled without explanation a €500m perpetual exchange offer it had put to market on June 18th.
As the following Reuters story reports, speculation has focused on there not having been enough demand for the offer (our emphasis):
VIENNA, June 29 (Reuters) – Austria’s Raiffeisen Zentralbank on Monday said it withdrew an offer to exchange a 500 million euro ($700 million) hybrid bond into a higher yielding one. A source close to the deal said that only around a fifth of the old bond’s owners had accepted the offer.
“This would have meant that the new bond would have been too small to have sufficient liquidity,” the source said. RZB had launched an offer on June 18 to swap the outstanding bond into a new one at 55 percent of face value, a deal which could have bolstered the unlisted bank’s core Tier 1 ratio through a book gain of up to 225 million euros.
But the bank, owner and main funding source of emerging Europe’s No.2 lender Raiffeisen International , late on Monday in a statement withdrew the offer. It did not say why. Banks including Allied Irish Banks, Royal Bank of Scotland, UBS, and Standard Chartered have succesfully made similar bond buybacks or exchanges this year to improve their Tier 1 capital ratio. To compensate investors, RZB’s new bond would have had a 15 percent coupon – which analysts have said was high compared to other deals due to RZB’s emerging European exposure — after the old one had carried a 5.169 percent coupon.
Among those picking up on the withdrawal was Zero Hedge’s Tyler Durden, who offered the following theories as to why the bond may have been pulled:
1. Complete lack of investor interest
2. Concerns about what would happen once the lack of interest is made public
3. Trouble with accountants
4. rating agency getting back to the bank that this would be treated as a distressed exchange (as Zero Hedge speculated), putting the company into an Event of Default.
We’re not so sure whether an exchange of this nature really is tantamount to default, as Zero Hedge makes out. However, what is certainly intriguing is the unusually high coupon that had been offered as a sweetener and why, despite that, the offer may still have been unsuccessful. It’s also worth watching because the expected settlement date – had the offer not been pulled from market – would have been today, Wednesday July 1st.
Not to make too much of the following, but it does happen to be the day after the IMF put out a relatively gritty report on the Austrian banking industry, especially when compared to their previous view. As the IMF wrote:
The Austrian economy, which did well until recently, is now feeling the full impact of the global crisis. The economy’s openness and outward orientation—major contributors to past growth—mean that it cannot insulate itself from foreign shocks. The transmission runs through two main channels: trade—in particular the negative impact on exports of the worsened outlook for the European region—and financial flows—including the impact of the slowdown in Eastern Europe on the returns on foreign investments of the Austrian banks and corporates. These shocks have a major adverse impact on the economy.
The key advice being that Austrian banks look to increase their capital buffers.
11. We welcome the OeNB’s use of stress tests to identify banks’ vulnerabilities. The stress testing methodology applied by the OeNB is in line with international best practice. Current indications from the tests are that the capital ratios of all systemic banks would remain above minimum regulatory requirements under a range of adverse shocks. Because of uncertainty over the impact of the recession on future levels of banks’ non-performing loans, ratios well above the regulatory minimum may still be needed to support private investors’ confidence in banks. The authorities are therefore advised to discuss with the banks the potential need to further increase capital buffers in the period ahead. The large size of the government support package suggests that there are sufficient resources to respond to demand, if any, for further public sector participation.
Of course, an exchange of this sort would have helped Raiffeisen raise some capital. Accordingly, the bank might have seen the whole thing as worthwhile despite it potentially being viewed as a distressed exchange by the ratings agencies. This is especially so considering other institutions have been doing similar deals.
However, the point is, if even the bond exchange raising capital route now may be closed to Raiffeisen what options does the bank have left as far as satisfying regulator calls for increased capital buffers?
Related links:
The hills are alive with the sound of Austrian bond auctions - FT Alphaville
Domino theory, Eastern Europe edition – FT Alphaville
Waiting for Latvia to devalue – FT Alphaville