Oof.
From sub-debt to equity and on to senior debt, then. We’re seeing some selling of Tier 1 European bank paper on Wednesday. The below from Suki Mann at SocGen:
And in words, from the Société Générale credit strategist:
The selling cares are in €2-3m clips – the market won’t really take any bigger sizes. The Street is in defensive mode amid the challenges facing Ireland and the uncertainty surrounding the Eurozone sovereigns. It all comes back to the extent of nationalisation of the banks in Ireland; where any bondholder haircuts will come as result of it and whether the Irish will put it all into legislation to ease it through. Understandably, participants in the T1 market are choosing to use the age old tried and tested formula to shoot first and ask questions later. We hasten to add that “larger-scale” type selling isn’t occurring with most choosing (we think!) to sit tight and ride out this current storm.
It’s not just in Tier 1 bond prices that nervousness is showing up.
CDS on senior European bank paper is also soaring. The catalyst, once again, is all that talk of burdensharing or ‘bail-ins’ for bondholders. This time though, they’re not just for sub-debt investors, but also for seniors — who traditionally have ranked above sub-debt and pari passu (the same) with depositors in a bankruptcy. They have also not had to share many of the losses involved in recent bail-outs, often to much criticism.
Here’s the Markit iTraxx European Senior Financials index, for instance:
Burdensharing for senior bondholders, illustrated that.
It’s a rather big thing for bond investors to come to grips with, of course.
The senior stuff has traditionally been the sacred cow of European credit markets, so there’s plenty of confusion, anger and market posturing. All the fuss, however, is not much different to the outcry that accompanied the notion of burdensharing for sub-debt holders back in late 2009. Sub-debt investors are still (perhaps surprisingly) getting ‘used’ to the idea — as recent lawsuits and protests should attest. So we might expect it to take even longer for the senior market to catch on.
We should note, however, that a widespread sell-off of senior debt, would tend to up the cost of funding for European financials. That’s what makes bail-ins so damn tricky.
Related links:
European bank bail-ins will cost +87bps - FT Alphaville
Flipping the capital structure - FT Alphaville
Casing the capital structure, calling a crisis- FT Alphaville