Contingent convertibles? Boring!
Mutual ordinary deferred shares? Über-boring!
Meet the new, more mysterious, hybrid capital. Instead of converting into equity when a certain Tier 1 level is breached (à la Lloyds’ CoCos), the securities are simply written down by 75 per cent of their face value, with the remaining 25 per cent paid to investors. Otherwise they act like normal bonds.
The bank with the capital idea: Dutch agri-lender Rabobank.
Here’s the FT:
The bonds are particularly notable because Rabobank, a triple A-rated institution, is doing this from a position of strength.
“Given the events of the past couple of years, we wanted to be absolutely sure that even the unthinkable could be hedged or mitigated,” said Bert Bruggink, chief financial officer.
Notable? You bet. They’re even more notable since the new securities won’t actually count towards Rabobank’s regulatory capital levels, to begin with, according to Reuters columnist Neil Unmack.
Instead, the idea is that the 75 per cent write-down would reduce Rabobank’s liabilities in times of stress. As a cooperative Rabobank can’t simply issue new equity — hence the sort of roundabout capital-raising. It’s worth noting too, that the bank has always had a soft spot for hybrid capital, but there’s still a rather big question mark hanging over the point of the entire exercise.
According to Bank of America Merrill Lynch, one of the four banks working on the deal, Rabobank currently has €29.3bn of equity capital. To hit the trigger, capital would have to fall by €12.9bn. And even being a relatively well-capitalised bank won’t necessarily mean Rabobank can get away with a cheap offering — it will still have to compensate investors for the added risk.
Anyway, we could say it’s worth watching the price/demand action on this offering; Lloyds managed to get its £14bn worth of CoCos off the ground largely because bondholders had little choice but to convert into them. Rabobank’s offering, sans-stick, could be a more valuable litmus test of CoCo sentiment.
But even Rabo’s offering might be skewed. From Bloomberg:
Rabobank Groep NV’s sale of bonds whose value depends on its capital ratios will offer few clues as to real investor demand for contingent capital instruments, according to analysts at CreditSights Inc.
. . .
“Investor interest could well reflect the opportunity to have a high coupon on triple-A paper, with many investors ignoring a writedown trigger that seems a remote risk,” London- based analyst Simon Adamson wrote in a note today. “We wonder how indicative this will be of demand for contingent capital instruments, given Rabobank’s unusually strong credit profile.” Adamson said he also questioned “why Rabobank even feels the need to issue this type of instrument.”
Related links:
I should not have CoCo-ed? – FT Alphaville
The perils of fail-safe capital – Business Spectator