Crunch time for bank hybrid callers
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FIG

Crunch time for bank hybrid callers

Hybrid tier one issuance has yet to make an appearance this year — and, thanks to the Basel Committee, it is unlikely to for months. But not only do banks have to worry about future-proofing new deals, they also have to work out what to do with $22bn of bonds callable in 2010.

The lack of hybrid issuance so far this year does not come as a surprise for many market participants. After all, following the bombshell dropped by the Basel Committee right at the end of last year, many are still trying to assess what to do and what the future holds for bank hybrids in the coming months.

Most of this hesitancy hinges on Section 84 — the grandfathering rules that will be adopted by the regulators. We know where we are, and we know where we will be in 2013 — we just don’t know how we will get there.

“It’s frustration time for issuers,” says the head of FIG DCM at a US bank, summing up feelings among market participants. Most agree that it would take a very brave issuer to opt for a step-up structure — at least until the impact assessment is over in April.

But some market participants are clinging to hopes that the proposals could still be watered down and say that issuance could yet occur, even if it’s difficult to future-proof issuance. Still, estimates of issuance levels will probably have to be revised downwards.

One option for issuers — which would follow the trend of the end of last year — would be to raise hybrid tier one through the non-innovative route. After all, non-innovative instruments have the loss absorbency features and deferability of payments coveted by regulators.

However, even that is complicated by local preferences.

“Broadly speaking, if you are meeting the loss absorption criteria, you should be fine,” said another FIG banker. “However, we have an example of a jurisdiction in which we were thinking of a non-step fixed but with a reset for the coupon, something that was compliant in 2009, and the local regulator said it would prefer to see a fixed for life instrument because it would offer a better quality of capital rather than a resettable deal.”

Non-call excuses

In this environment, nobody wants to push too hard — the risk of issuing what soon turns out to be 10 year senior debt with near double-digit coupons is just too high. Clearly what and when to issue will be the hot topics of the coming weeks — but for some issuers there is a more pressing problem: whether or not to call tier one deals launched either in the early and mid-part of the past decade that are coming up to their first call date.

Some say issuers could use the regulatory uncertainty as an excuse to leave their deals outstanding and let them step up as grandfathering is likely to apply. There are just over $22bn of hybrids up for call in 2010 and while extension risk is not new, it now concerns a much larger pool of issuers than previously considered at risk.

Bankers are sanguine about that, though — they say that since regulators, rating agencies and equity analysts are no longer giving as much credit for these deals, the issuer has no reason not to call. Regulators will want issuers to replace these deals with higher quality — and more expensive — capital instruments.

“We are past the cosmetic dressing of banks’ balance sheets,” says another FIG banker.

As ever, FIG DCM bankers are optimists. Even if issuance does not happen in the first few weeks and months of the year, they are confident that as and when it returns, there will be enough time to get deals away — and even that the current hiatus could help future demand. However, it is perhaps their ECM colleagues that should have even more reason to feel optimistic.

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