Three Bank Failures Barely Cool Demand for Riskiest Lender Debt

  • AT1 market sees record low coupon and busiest sales since 2015
  • Junior bondholders lost out at Italy, Spain banks last month

Buyers of the riskiest bank bonds, who witnessed three failures last month, are proving to be a resilient bunch.

HSBC Holdings Plc sold so-called additional Tier 1 notes with a record-low coupon last week, capping the busiest quarter for AT1 sales by European banks in more than two years, according to data compiled by Bloomberg. Risky bank debt also returned 9.4 percent in the first half, compared with a loss of 2 percent in the same period a year earlier, based on Bank of America Merrill Lynch index data.

The appetite contrasts with last year when concerns about capital levels at Deutsche Bank AG sparked a marketwide selloff and a shutdown of the AT1 new-issuance market. Now investors are seeing value in the notes, which pay more than other types of bank debt, and are concentrating on picking out notes from financially strong lenders.

“They are still very attractive despite the rally,” said Marc Stacey, a fund manager at BlueBay Asset Management Ltd. in London, which oversees $51 billion. “However, it is critical to get your issuer selection right.”

Deutsche Bank AT1s, which plunged to as low as 70 cents on the euro last year, have rebounded to about face value. The lender boosted reserves with a share sale and agreed a lower-than-anticipated settlement to end a U.S. investigation. 

Subordinated bondholders were wiped out in the three bank rescues last month. Banco Popular Espanol SA was sold to Banco Santander SA for a nominal 1 euro after regulators deemed the bank likely to fail. Italy restructured Veneto Banca SpA and Banca Popolare di Vicenza, with their good assets being handed to Intesa Sanpaolo SpA. Of the three failed lenders, only Popular had issued AT1s.

The losses highlight the risks in subordinated bank debt. Still, the fact that AT1s and higher-ranking Tier 2 notes were both written off at Popular may cause investors to shun supposedly safer and lower-paying Tier 2 debt for higher-coupon AT1s.

“Investors will think again about how they value Tier 2 bonds,” said Barry Donlon, UBS Group AG’s global head of capital solutions.

HSBC Coupon

HSBC agreed to a coupon of 4.75 percent in its recent 1.25 billion-euro AT1 issue, the lowest ever for a euro-denominated sale, according to data compiled by Bloomberg. The lender paid 6 percent in a similar September 2015 issue. 

European banks sold $11.7 billion of AT1s in euros and dollars last quarter, the highest tally since the first three months of 2015, Bloomberg data show. Spain’s Bankia SA will begin marketing AT1s this week, according to a person familiar with the matter, who asked not to be identified as the matter is private.

Landmines may remain. Shipping lender Bremer Landesbank said June 20 it will skip voluntary coupon payments on its AT1s, mostly sold to parent Norddeutsche Landesbank, to help rebuild its balance sheet. Banca Monte dei Paschi di Siena SpA is on course for an Italian state bailout that will probably hit some bondholders. Portugal-owned Novo Banco SA is seeking to negotiate losses on senior bonds to ease a sale to Lone Star Funds. That follows the imposition of losses on 2 billion euros of senior debt in late 2015.

Pain in Spain

Some Spanish lenders’ subordinated notes also tumbled after the Popular bail-in. Banco de Credito Social Cooperativo SA’s 300 million euros of 7.75 percent notes due June 2027 have fallen to 91 cents on the euro from face value in early June. Liberbank SA’s 300 million euros of March 2027 junior bonds have fallen to 91 cents from 105 cents.

The sell-offs were limited to weaker lenders, according to Vanguard Asset Services analyst Samuel Lopez. That’s a clear contrast to last year’s industrywide AT1 rout.

“Investors no longer see subordinated bank capital as one asset class,” said Henrik Johnsson, the co-head of Deutsche Bank’s debt syndicate. “That’s why we haven’t seen much impact.”

— With assistance by Katie Linsell

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