LONDON, Nov 29 (IFR) - European banks will use Tier 2
instruments and other forms of subordinated debt to boost total
capital levels until there is more clarity on the regularity and
tax treatment of hybrid Tier 1 debt in 2013, bankers and issuers
said at Citi's European Credit conference on Thursday.
Over the course of 2012, banks have focused on raising Tier
2 capital mainly to protect senior bondholders that are under
threat of looming bail-ins.
The low rate environment has ensured the cost of Tier 2
capital is relatively low and there is less regulatory
uncertainty surrounding these instruments. As much as EUR200bn
of Tier 2 could potentially hit the market over the next few
years. Once rules governing Tier 1 are clearer, issuance could
be as large as EUR150bn.
"Issuers will want to take advantage of market windows as
there is a feeling that if they leave it too long then they will
get caught up in a lot of supply," said Simon McGeary, head of
new products group at Citi.
Facing a mixture of investors, bankers and issuers in
London, a panel of market experts said that other new products
could start to appear, including Intermediate Subordinated Debt
effectively the return of Tier 3 capital - short-dated
subordinated debt - that would sit as a buffer between senior
and Tier 2.
This layer would help to shield senior unsecured bondholders
from the looming threats of bail-in.
"This will make sense for some issuers even if it acts
purely as credit support for senior," said McGeary. But issuers
had mixed views.
Rabobank, which has bolstered its total capital through the
issuance of two Tier 2 deals this year said it was likely to be
proactive in such instruments.
Michael Gower, treasurer at the Dutch bank, said there was a
risk that investor concerns about the risks for senior
bondholders regarding bail-in could re-emerge, and that senior
bondholders would therefore want comfort about what debt was
sitting below them as loss absorbers.
"We're likely to be more proactive in this process and we
will look at potential Tier 3 instruments very closely, and it
would not surprise me if there was more regulatory clarity on
this area," said Gower.
Other panellists were less receptive, saying that bank
capital structures were already very complicated and that such
new instruments would just add more complexity.
Jennifer Moreland, head of long-term unsecured and capital
issuance at Barclays, said she found it hard to get excited
about Tier 3.
"There are already so many layers of capital to analyse, and
the market is still not doing a good enough job of pricing
those," she added.
The bank capital market has been helped by increasing
investor appetite for higher yielding product and as the
European Banking Authority prepares to provide further clarity
on temporary write-downs, banks are expected to go a step
further begin to sell Additional Tier 1 hybrid debt.
The importance of raising capital was emphasised throughout
the morning session as bankers noted there is a clear link
between higher capital levels and lower funding costs.
Maintaining a fortress balance sheet with strong capital
levels was important to maintain access to the senior debt
market at attractive levels, McGeary said.
The fact that investors have already been buying senior debt
past the 2018 watershed when bail-ins will come into force under
the Crisis Management Directive was an encouraging factor on the
prospects for senior issuance.
"There is a feeling that the move to senior bail-ins is
unstoppable now," said McGeary.
"Not only is it going to happen, but the market has been
quite grown up about it."
Regulatory uncertainty surrounding Basel III is expected to
continue well into 2013 as bankers expect more clarity on the
European CRD4 by the middle of next year.
European and US banks have been seeking to delay the release
of stricter capital rules recent weeks as they seek out more
clarity on a number of sticking points including SIFI buffers
and bank remuneration.
(Reporting by Aimee Donnellan, Natalie Harrison; editing by
Helene Durand and Alex Chambers)