What fresh hybrid debt hell is this?
KBC Bank has today launched tender offers in certain countries in Europe and, in respect of one security, in the United States of America to repurchase four series of outstanding hybrid Tier-1 securities with a total nominal value of approximately €1.6 billion.
The securities will be purchased at 70% of their face value. By doing so under current market conditions, KBC Bank offers bondholders an opportunity to exit by paying a premium above the market price. At the same time, KBC Bank will generate a value gain when buying back at a discounted price compared to the nominal value of the securities, which further enhances the quality of its core capital position. If all outstanding securities would be bought back, the after tax value gain would be approx. 0.2 billion euros while the impact on the core Tier-1 ratio, banking would be estimated at 0.25%.
This is the hybrid debt — or subordinated bonds — which have made headlines in recent weeks.
The European Commission has come up with the concept of `burden-sharing’ for bank bondholders, which basically means debt investors will be forced to share some of the pain of state-sponsored bailouts. Thus, the EC is recommending bailed-out financial institutions defer coupon payments on subordinated debt and/or not redeem their callable hybrids at their first available dates.
In fact KBC, which is partially state-owned, had to perform a rather dramatic u-turn on a handful of its hybrid bonds earlier this month. The Belgian bancassurer had initially said it would not be paying coupons on the debt, under EC advisement, but then discovered it was actually legally obliged to.
In any case, KBC itself received something like €7bn in bailout funds — so the fact it’s being allowed to buy back €1.6bn of its debt at a 10 per cent premium to the current market price throws the concept of burden-sharing into some confusion, at first glance.
However, as the below Bloomberg story suggests, there is still an element of investor pain here:
“We expect relatively low acceptance of KBC’s offer,” Ivan Lathouders, an analyst at Banque Degroof SA in Brussels who has a “reduce” recommendation on the shares, wrote in a note to clients today. “Banco Santander had only 4 percent acceptance, at prices above the prevailing market price.”
Related links:
Adventures in hybrid debt, fixed income edition – FT Alphaville
The hybrid conundrum – FT Alphaville
RBS hybrid debt – FT Alphaville