Bank Credit Risk Rises on HSBC Earnings as Barclays Plans Bond

The cost of insuring against default on European bank debt rose after HSBC Holdings Plc (HSBA) posted profit that missed analysts’ forecasts. Barclays Plc (BARC) is planning an issue of contingent notes to boost capital while Glencore International Plc (GLEN) tapped an existing pound-denominated bond.

The Markit iTraxx Financial Index on the senior debt of 25 banks and insurers rose three basis points to 175 as of 1:17 p.m. in London, according to prices compiled by Bloomberg. Swaps on HSBC Bank Plc rose as much as seven basis points to 110 before falling back to little changed.

HSBC, Europe’s biggest bank, said it’s setting aside $800 million to cover the cost of a probe into allegations it broke U.S. anti-money laundering rules. Confidence in financial credit was also hurt by a Welt am Sonntag report that the European Central Bank may have broken its own collateral rules when making bank loans.

“People are worried that the visible problems with banks are only the tip of an iceberg,” said Bill Blain, a London- based credit strategist at Mint Partners Ltd., a division of BGC Brokers LP. “The picture for U.K. banks is pretty bleak, but it’s their size and success that has made them easy targets for regulators to fine.”

Credit-default swaps linked to London-based Lloyds Banking Group Plc climbed six basis points, or 3.2 percent, to 176, according to Bloomberg prices. Contracts on Royal Bank of Scotland Group Plc in Edinburgh rose four basis points to 191.

Pretax Profit

HSBC’s underlying pretax profit rose to $5.04 billion in the third quarter from $2.24 billion a year earlier. That missed the $5.6 billion median estimate of eight analysts surveyed by Bloomberg.

Banks received up to 16.6 billion euros ($21 billion) in ECB loans that they shouldn’t have, if the central bank applied its collateral rules strictly, Welt am Sonntag said. Spanish government bonds, which were pledged as collateral, only partially met requirements, the newspaper reported.

Barclays, which in June was fined for rigging interest rates in the latest of a series of regulatory missteps, will hold investor presentations from tomorrow on a contingent note sale, which would be the first by a U.K. bank since regulators told lenders to bolster capital buffers in September.

Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and Morgan Stanley will manage the deal, said a person familiar with the financing, who asked not to be identified because they’re not authorized to discuss it.

Contingent bonds convert to equity or are written off when capital ratios fall to a preset level. Jon Laycock, a spokesman for Barclays in London, declined to comment.

Glencore Tap

Glencore, the world’s largest publicly-traded commodities supplier, is adding 200 million pounds ($320 million) to its 5.5 percent bonds due April 2022, a person with knowledge of that transaction said. HSBC and Banco Santander SA (SAN) are the arrangers.

Rottapharm SpA, a family-owned Italian drugmaker, plans to refinance debt and pay its owner a dividend with a high-yield bond issue and new loan facilities.

The company is seeking to sell 400 million euros of seven- year notes and put in place a 100 million-euro revolving credit facility, according to the prospectus for the financing seen by Bloomberg News. The proceeds will be used to repay 416 million euros of existing loans and pay 20 million euros to its owner.

Monza, Italy-based Rottapharm will meet with investors prior to the bond fundraising through its Irish business, a banker with knowledge of its plans said.

Virgin Bonds

Virgin Money Holdings U.K. Ltd., Richard Branson’s financial-services company, will sell mortgage bonds, a person with knowledge of the deal said. The company, which a year ago bought failed northern English mortgage lender Northern Rock Plc, will meet investors from tomorrow prior to the issue, which will be secured by home loans, the person said.

The Markit iTraxx Crossover Index of swaps linked to the debt of 50 mostly junk-rated European companies rose six basis points to 520, while the Markit iTraxx Europe Index of 125 investment-grade companies rose two basis points to 130.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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