Similar to Banco do Brasil’s tier one transaction in January, VTB’s hybrid capital deal is expected to allow plenty of scope for changes. For example, VTB can strip out a dividend pusher and introduce principal loss absorption when Russia brings in Basel III rules.
So what investors buy today could become a very different instrument when Russia implements the global agreement on bank stability. Estimates vary greatly on when that might happen — some are looking at 2013, others at 2017.
That means evaluating the risk on the transaction being sold this week is a tough call. And pricing it will be a delicate exercise.
Pricing the instrument aggressively runs the risk of a flop. No one wants that — least of all rival bankers who are hoping a strong secondary market performance will drive demand for more supply. But overly generous pricing could also stymie more supply from cost-conscious issuers. There are plenty of those in Russia.
VTB will have to pay a premium for the variation clauses in its structure. That has raised fears the deal will set an expensive precedent. If the next Russian bank to follow opts for more plain vanilla terms and conditions, it may take intensive work with investors to convince them the yield should be lower.
Undoubtedly, the scope of variation open to VTB makes executing the deal more complicated. But the deal should not be viewed as worrisomely risky. For a start, the leads have tried hard to incorporate investor protection features.
And ultimately, the risk is not unlimited. Under the most extreme changes available, the security will simply fit the mould that the rest of hybrid tier one capital will have to comply with under Basel III rules.
That is something that investors will simply have to get used to, sooner or later.