ING Groep Sells Risky Bonds That Could Become Even More Risky

  • Sale includes option to replace debt with different notes
  • Lender seeks flexibility ahead of new bank-capital rules

ING Groep NV sold risky bonds with an option letting the Dutch lender make them even riskier.

The bank issued 1 billion euros ($1.1 billion) of subordinated Tier 2 notes through an operating company, while retaining the right to swap the debt for similar bonds issued by its holding company. The option increases risks because holding-company debt is more vulnerable to losses if a bank runs into trouble.

The structure gives Amsterdam-based ING the ability to re-arrange debt once Dutch lawmakers agree on how to implement new international bank-capital rules. The drawback for potential investors is the lack of clarity about how risky the debt will end up being. 

“It’s a difficult one to value,” said Philippe Kellerhals, a senior portfolio manager at London-based Cairn Capital Group, which manages and advises on assets totaling about $15 billion. “Investors have to accept uncertainty about whether ING will use the holding-company model more in future.”

The deal priced at 285 basis points above benchmark rates, according to data compiled by Bloomberg. The initial price target was 300 basis points, said a person familiar with the matter, who asked not to be identified because they aren’t authorized to discuss the matter publicly.

ING has the right to swap the bonds for notes issued by its holding company through April 2018, the person said. Holding-company debt is structurally subordinated to liabilities at operating companies.

“The substitution option on the bonds gives us the flexibility to adhere to regulatory rules in the future,” said ING spokesman Christoph Linke.

Scandinavia Lenders

Scandinavian banks may make use of similar options because their local regulators are also yet to make final decisions about which bonds will count as capital, said Robert Montague, senior financials analyst for ECM Asset Management in London, which manages about $9 billion. This will probably only be a short-term situation until regulations are drawn up, he said.

Under the international rules, large lenders have to issue debt that they can potentially use to recapitalize and avoid bankruptcy. Banks in the U.K. and Switzerland are already doing by this selling bonds through holding companies.

Other European nations have decided on different ways of meeting the capital requirements. Germany and Italy have amended laws, while France plans to introduce changes to bond documents.

Before it's here, it's on the Bloomberg Terminal.