Worldwide Banking Debt Vortex Sucks In Strongest Lenders' Bonds

Even stronger lenders can’t escape a global selloff of risky bank debt.

Junior notes issued by Wells Fargo & Co., Swedbank AB and Lloyds Banking Group Plc all tumbled to record lows this week amid growing concerns about investment-bank profits and capital at financially stretched lenders. That all three have limited securities operations and healthy capital cushions wasn’t enough to stop the slump.

“It is tricky to see what is rational in the fear,” said Anne-Charlotte Com, a credit analyst at Kepler Cheuvreux SA in Paris. “The banks that have a big investment bank are really the worries.”

The bank-debt selloff gathered renewed steam on Thursday after weaker-than-expected earnings at European lenders including Societe Generale SA and Unione di Banche Italiane SpA. That revived concerns fired up by a potential slowdown in global growth, waning investment-bank profits and the effect of tighter regulation on lenders’ ability to make non-guaranteed debt payments.

The industrywide slump means market-leading returns from the riskiest bank debt last year have been erased in barely six weeks of 2016. The Bank of America Merrill Lynch’s Contingent Capital Index, which largely tracks debt issued by U.S. and European banks, has tumbled to a record low. Banks can be forced to stop payments on the so-called additional Tier 1 notes when capital falls below a certain threshold.

One reason for the indiscriminate slump in bank debt may be sovereign wealth funds selling investments as tumbling oil prices press government budgets, according to Wee Mien Cheung, who oversees about 15 billion euros of debt at Delta Lloyd Asset Management in Amsterdam. U.S. crude was below $27 a barrel on Thursday.

“No one is immune,” he said. “Sovereign wealth funds invested heavily in financials -- now they’re having to take a big slice out of their portfolio and a big chunk of that is banks.”

Wells Fargo’s $2 billion of 5.9 percent subordinated bonds fell 3.5 cents on the dollar to 94 cents at 11:21 a.m., according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Swedbank’s $750 million of 5.5 percent bonds fell 1 cent to 90 cents, and Lloyds’ $1.7 billion of 7.5 percent notes dropped 6 cents to 93 cents.

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