Some investors are starting to question whether the increasingly arcane world of bank bonds is one they can be bothered dealing with.
From his office in Oslo, where Lars Tronsgaard helps oversee $9 billion in debt as deputy managing director of Norway’s Folketrygdfondet, the view is that monitoring a big portfolio of bank bonds is now “more complicated and much more resource demanding” than it was just a few years ago.
The introduction of bank resolution rules designed to protect taxpayers from financial industry losses is adding to pressure on investors to be far more discerning. And with supervisory authorities in Scandinavia generally setting stricter standards than their counterparts elsewhere, banks in the region are relying more on complex hybrid securities to fill their regulatory buffers.
Folketrygdfondet, which is the domestic counterpart of Norway’s $830 billion sovereign wealth fund, invests mostly in Norwegian and other Nordic assets, with 40 percent of its total portfolio destined for fixed income and the rest in stocks. The fund is due to report annual results on Wednesday, when it will reveal details of shifts in its investments.
In Norway, banks have issued more so-called additional Tier 1 notes than anywhere else, relying increasingly on a debt instrument that has only existed since 2013 and that forces investors to absorb losses if bank capital levels drop below pre-set thresholds. AT1s are also popular in Denmark and Sweden.
“How resistant the senior bonds and the Tier 1 capital are to bank losses has become more important because of the bail-in regulations -- that is a new concern, and we have models where we monitor this on specific banks,” Tronsgaard said.
Adding to the confusion for investors are national discrepancies in how regulators interpret the main characteristics of contingent convertible debt, of which AT1s are the riskiest form.
“Before there was a tendency to rely on the authorities,” Tronsgaard said. “Now the owners and lenders should take the losses, not the public.”
At Folketrygdfondet, the concern is also that spreads still seem not to reflect the different risk levels that the new regulatory environment has created.
“We thought that this kind of regulation would contribute to spreads widening but the last year’s widening we think is just as much a general one,” he said. “We haven’t been able to observe a differentiation of spreads between different banks. If the bail-in regulations were the cause, we would have seen bigger differences.”