The Italian bank sold the first preferred senior bond with a call option one year ahead of maturity.
This structure has become a normal feature in non-preferred senior instruments, which were specifically designed to meet requirements for bail-inable debt, known as total loss-absorbing capacity (TLAC) or Minimum Requirement for own funds and Eligible Liabilities.
The call option helps banks miss out on the period at the end of the life of a senior bond in which it stops counting towards these regulatory ratios.
In replicating the one year call format for one of its preferred senior bonds, UniCredit was acknowledging the fact that it will also be using this product as part of its TLAC stack.
There is nothing untoward about this: the TLAC rules give banks room to use some preferred senior debt to count towards their requirements, paving the way for structural innovation.
But the debate is still raging as to whether the product is actually appropriate for bail-in.
Many expect that regulators wouldn’t go as far as to touch these types of bonds in a resolution, because of fears about what legal claims other senior creditors could then be entitled to.
UniCredit’s decision to dress one up like a non-preferred senior bond this week shows how difficult it has become to tell what is TLAC and what isn’t.
Preferred senior bonds can look like non-preferred instruments from a regulatory point of view, but they may not end up acting like them.
For financial debt investors, the game of spot the difference in bank capital is getting harder by the minute.