Cracks Appear in European Bank Sub-Debt Market


I’ve never been a fan of Banks’ subordinated debt, on the grounds that, while you get paid for term of T, you are taking the risk of a term of T+5 … and the penalty rate of interest that normally gets paid on the last five years means that the only time you will actually have exposure to the T+5 paper is when the issuing bank is under stress, and you’d really, really, not have this exposure. Or, at least, not at your going-in, term T price. Note that Sub-Debt comes in two levels; the ultra-cool European “LT2” means the same thing as the coldly-technical North American “Tier 2B”.

An Italian bank has just allowed its sub-debt to go to T+5:

The market is at risk because one borrower has broken ranks. Credito Valtellinese Scrl ignored the April 30 call date on its 150 million euros ($236 million) of notes. As a result, the bank will pay a penalty interest rate of 160 basis points more than money-market rates — higher than the 100-basis-point premium it paid for the past five years, though still lower than it would probably pay to refinance.

There’s another twist to the tale. Because exercising the call option messes with a bank’s capital structure, the repayment has to be sanctioned by regulators. Banca Antonveneta SpA, an Italian lender bought by Banca Monte dei Paschi di Siena SpA last year, has asked the Bank of Italy to agree to its repaying 450 million euros of notes at the April 23 call date.

The authorities, though, may be reluctant to allow firms to weaken their finances in the current environment. Credito Valtellinese’s heresy may swiftly become commonplace.

TD Bank has a good on-line summary of their sub-debt [although some of it is actually Innovative Tier 1 Capital]. Most of their issues carry a penalty rate of BAs+100, although their most recent issue has the T to T+5 portion at BAs+200.

CIBC’s penalty rate is BAs+100.

Scotia’s penalty rate is BAs+100.

RBC’s penalty rate is BAs+100

BMO does not provide a convenient listing … an issue from last year has a penalty rate of BAs+100, while one from last month is CDOR+250

National’s penalty rate is BAs+100

Who knows? We might be in for some interesting times!

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