Car sales are related to economic growth and consumer confidence, says Citi. But wait! The bank’s analysts, Philip Watkins makes the journey to that humdrum conclusion interesting — with a detour through the banks, psuedo-banks, and financing operations of the European car companies.
Even if sales are tied more to GDP than to interest rates — seven in every ten new cars are sold on credit these days. Plus, the financial companies hiding within the automakers have around €400bn of assets and produce a sixth of of pre-tax profits (click chart to enlarge). Read more
Credit Suisse has announced that it will issue $6.2bn of contingent capital notes, debt that will convert into equity at a certain trigger point, reports FT Alphaville. Qatar Holding LLC and Saudi Arabian conglomerate, the Olayan Group, two of the Swiss bank’s biggest investors, will receive some notes in exchange of existing hybrid debt issued by Credit Suisse. Only Swiss regulators have so far explicitly backed cocos, in plans to make Credit Suisse and UBS issue billions of dollars worth of the bonds by 2019 to provide an extra capital buffer, the FT reports, noting that the sale will be watched closely by the market for signs of interest in the products.
Credit Suisse says it just gave the latent CoCo market a $6.2bn shot in the arm.
On Monday morning the Swiss bank announced it would issue Chf 6bn ($6.2bn) of Contingent Convertible securities — or debt that will convert into equity once a certain trigger is reached. In this case the trigger is if Credit Suisse’s reported Basel III common equity Tier 1 ratio falls below 7 per cent, or if the Swiss regulator thinks that the bank requires public support. The CoCos therefore look like they satisfy both Finma and Basel’s ideas of when CoCos should convert. Qatar Holding LLC and Saudi Arabian conglomerate, the Olayan Group, are the investors in the new CoCo issue. Read more
CoCo *pops.* Curtains for CoCos. And so on.
Late on Thursday the Basel Committee released its final (and curt) rules on loss-absorbing bank capital, including the mandate that all Tier 1 and Tier 2 instruments are able either to be written off or converted into equity at the behest of regulators. Read more
On Thursday, Anglo Irish — Ireland’s euro-guzzling bailed-out bank — unveiled a dramatic exchange offer for investors in its subordinated, or junior, debt.
The bank is offering holders of some of its outstanding sub-debt to swap their notes for new Irish government guaranteed bonds that will be due in 2011 with a coupon of three-month Euribor plus 3.75 per cent. Holders of the €1.57bn worth of three Lower Tier 2 (LT2) bonds will receive just 20 cents on the euro. Investors in about €377m of perpetual junior debt will get even less — 5 cents on the euro. Read more
Here’s a data point for those skeptical of CoCo capital’s saving graces.
(CoCos, or contingent convertible capital, are a kind of convertible bond that automatically switch into equity once certain capital or bailout triggers are breached.) Read more
Ireland may have forsworn a default on senior bank bonds — but the subordinated stuff could turn out to be a rather different story.
On Thursday morning, Irish bank CDS shot sharply up on [UNCONFIRMED] chatter of an imminent “Allied Irish default” : Read more
The Basel Committee published a 20-page consultative document on loss absorption in capital instruments — something that’s (finally) gaining some serious regulatory attention after the recent financial crisis, says FT Alphaville. Then the tendency was for shareholders to bear the burden of bank losses, while bondholders were bailed-out by the government, with the banks. But will bondholders now get too much potential downside risk, with equity holders getting too much potential upside? Read more
Basel goes bank CoCo nuts. Or as the Basel Committee has put it more, ah, soberly:
The Basel Committee is of the view that all regulatory capital instruments must be capable of absorbing a loss at least in gone-concern situations. Furthermore, it believes that a public sector injection of capital needed to avoid the failure of a bank should not protect investors in regulatory capital instruments from absorbing the loss that they would have incurred had the public sector not chosen to rescue the bank. Read more
Amongst all the criticisms of the European stress tests, there’s one glaring omission.
From the Committee of European Banking Supervisors’ summary report: Read more
A new type of hybrid bond offered by Italy’s UniCredit could provide a template for European banks wanting to raise capital ahead of the new rules on funding, the FT says. The bank on Tuesday began talking to investors about a new hybrid that will comply with European Union regulations, known as CRD II, coming into force at the end of this year.
TruPS CDOs may have escaped the full wrath of US financial reform, but they still have to deal with the rather daunting prospects of their underlying collateral — those Trust Preferred Securities (TruPS).
To wit, a fantastic soap opera of a structured finance story. There’s even a Texan billionaire involved. Read more
Bank regulators may have moved to crack down on hybrid capital, but the banks themselves seem to have other ideas.
Witness HSBC’s $3.4bn sale of perpetual bonds last week. Read more
RBS on Thursday night disclosed details of its long-awaited plan to buy back up to £7.7bn ($11.4bn) of debt and preference shares, a move that should boost the quality of the bank’s core capital. RBS’s finance director admitted the buy-back was more conservatively structured than many bondholders had expected but said the plan was a sensible compromise.
RBS is planning a vast balance sheet restructuring in an attempt to boost its capital and standing with bond investors. The move could involve at least £10bn (€11bn) of the bank’s £28bn of debt being bought back at a premium to current prices. This would echo similar moves at other banks, most obviously Lloyds TSB, which in December unveiled a £10bn deal as part of a £23.5bn capital restructuring.
On Monday, Santander said it was buying back as much as €2.5bn in debt, including hybrid bonds from Abbey and Alliance & Leicester, the British banks it bought in 2004 and 2008, respectively.
That same day, the Spanish bank also began its £15m UK rebranding campaign, in which it will switch the signs and colours gracing the hundreds of Abbey, Alliance & Leicester (and its other UK acquisition, Bradford & Bingley) bank branches in Britain to those of Banco Santander. Read more
There’s a much more substantial test looming on the horizon for CoCos — the new darlings of the bank capital universe.
Yorkshire Building Society announced on Tuesday that it’s set to finalise a deal to take over its loss-making rival Chelsea. Part of the takeover is a plan to exchange the full outstanding principal amount of Chelsea’s subordinated debt for new notes which will be issued by Yorkshire once the merger’s completed. And those new notes will take the form of Contingent Convertibles — the cutely-named CoCo. CoCos are bonds that convert into equity once a certain trigger is breached. In the Yorkshire/Chelsea case, that’s if Yorkshire’s Core Tier 1 capital ratio falls below 5 per cent. Read more
Here’s some useful data from ratings agency Fitch – a breakdown of how the capital of banks in the United Arab Emirates is likely to be impacted by the Dubai World debt restructuring.
It’s basically an updated version of Fitch’s capital sensitivity test for UAE banks, which the rating agency first conducted in September 2009: Read more
Burden sharing for European bondholders is something the market has become extremely familiar with in recent months.
So Allied Irish Bank’s announcement on Tuesday morning, that it has agreed to the European Commission’s request that it should not make discretionary coupon payments on its Tier 1 and Tier 2 capital bonds, should not come as a major surprise. Read more
Watch out for those Moody’s hybrid debt downgrades!
They are coming: Read more
As outlined in our criteria, we do not consider contingent capital securities to be a form of common equity. We can include them as hybrid equity depending on their exact features. If the conversion trigger is set at a level that we think would lead to a conversion occurring too late, then we will treat the contingent capital security according to its initial format when considering how much “equity credit” to give to the instrument. For example, if a contingent capital security initially takes the form of a nondeferrable subordinated bond, we would treat it as having “Minimal” equity credit according to our criteria. In this case, we would see the conversion as happening too late to give equity credit in our broad measure of capital–adjusted total equity, which includes hybrid capital securities subject to strict limits.
Oops. Read more
Apparently they are not always obvious, as the below press release, from Moody’s, demonstrates.
And spotting hybrids is an important issue right now given that the European Commission is determined to impose the concept of burden-sharing on bondholders — forcing them to share some of the pain involved in state bank bailouts. That means, in practice, forcing banks to not make discretionary coupon payments or dividends, or early redemption, on some of their hybrid bonds — a la Lloyds. Read more
And so it began — the Lloyds statement detailing the bank’s plans to raise contingent capital is out.
This is a concept still confusing the market even as it’s gaining increasing prominence with regulators. In simple terms, contingent capital is a kind of convertible bond that becomes equity when a certain trigger is hit. In the Lloyds case, it will be if its core Tier 1 capital ratio falls below 5 per cent. Read more
Remember the hybrid debt, or subordinated bond, attack launched by the European Commission against certain Euro-area banks?
The Commission wanted bank bondholders to share some of the pain of government bailouts, and was advising financial institutions like RBS and KBC to not call some of their Tier 1 or Tier 2 debt at the earliest opportunity, or skip certain coupon payments. The market had been a little thrown recently, however, since Dexia and ING — both recipients of state aid — had been allowed to call some of their Tier 2 bonds. Was the EC getting soft on bank bondholders? Read more
… is something that can be done by buying European banks’ Tier 1 bonds — even hybrid ones — according to Société Générale credit analysts.
The whole thesis is based, firstly, on the idea that under new regulation (the strengthened Basel II, for instance) many banks will need to raise new capital. So far, so standard — but SocGen also thinks the capital raising will coincide with much higher bank profits (about 20 per cent in 2010) , thereby reducing the risk that coupons won’t be paid. Read more