De-risking deals can still be risky
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People and MarketsCommentLeader

De-risking deals can still be risky


Borrowers need to plan carefully to reap the benefits of liability management exercises next year

Bond experts expect liability management exercises (LMEs) will be increasingly popular with financial institutions in 2022.

The trend has already been in full view this year. Banks have been looking to get rid of old and expensive instruments while yields and spreads remain close to record lows.

Many have used tender offers as a way of creating space for new issues, allowing them to take advantage of strong market dynamics well in advance of scheduled call or maturity dates.

But with issuance conditions becoming increasingly volatile, such a de-risking strategy is not free from danger itself.

Buy-back exercises tend to take at least seven days to complete in Europe, from launch to final results. Firms may therefore be exposed be market movements over a significant timeframe, which is particularly dangerous if the borrower is also hoping to land a new transaction.

Uniqa brought a reminder of the delicate nature of LMEs this week. The Austrian insurer started a tender offer last Thursday, confirming that it would want to replace two repurchased tier twos with a new deal once the take-up had been confirmed.

But markets soured in the intervening period, following the discovery of the Omicron variant of Covid-19.

Uniqa was ultimately able to find strong demand for its replacement tier two this week, though it was said to have paid up handsomely to do so.

With markets expected to remain choppy throughout 2022, financial institutions may want to consider ways of reducing the risks in their LMEs.

In particular, borrowers could look to issue replacement deals before announcing tender results — as a way of ensuring they can access a more favourable market.

LMEs will offer greater peace of mind amid an uncertain outlook, but market participants must remember they can often be a very tender affair.

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