02 October 2012

FT: EU banks propose new breed of bond

Bankers scrambling to cushion the blow from new European rules to make bond investors shoulder more losses in a bank collapse have proposed issuing a new type of debt that could cut funding costs.

The new breed of bonds would rank between senior unsecured debt and “tier two” bonds in the pecking order of who is repaid when a bank fails under the proposed “bail-in” regulations. Bankers say that part of the answer could lie in new forms of debt that would provide a buffer between holders of senior unsecured debt, which have not typically had to bear losses when a bank fails and are among the first to be repaid, and tier two bondholders.

Analysts say that while spreads on senior un­secured debt, traditionally the mainstay of bank funding, have tightened recently, new regulations and the increased “bail-in risk” is likely to push up costs in the long run. Bankers are therefore examining their funding models to see what can be done to reduce those long-run funding costs while attracting investors searching for yield.

A recent spate of issuance of tier two debt, which lies further down the debt stack, by some banks will not only meet new Basel III requirements on bank capital but provide an extra buffer below senior unsecured bondholders, analysts say. But Emil Petrov, head of capital solutions at Nomura, says another way to cushion the impact of the European “bail-in” Directive on senior unsecured debt holders could be to introduce a new type of “designated bail-inable debt”. Nomura has been investigating whether there is a case for introducing “senior subordinated notes” that would rank between tier two and senior unsecured debt and which would absorb losses before senior debt should there be a bail-in event.

© Financial Times