LONDON, April 5 (IFR) - The European Central Bank's approval
of Italy's bailout of Veneto Banco and Banca Popolare di Vicenza
has highlighted the feeble application of post-crisis rules for
distressed lenders and triggered a rally in the duo's senior
Both banks confirmed on Tuesday the ECB had indicated they
qualified for a precautionary recapitalisation by the state,
prompting strong gains in their senior-ranked bonds.
These securities tumbled in March on fears the authorities
could pull the plug on the two banks, weighed down by toxic
assets, which have a combined capital shortfall of €6.4bn.
The Vicenza €750m 2.75% March 2020s, for example, had
climbed to 86.60 by mid-morning on Wednesday, up more than 14
points since Monday, according to Tradeweb. The Veneto €500m 4%
May 2019s also recovered, rallying from around 76.60 on Monday
to 88.60 by Wednesday.
The two lenders appear extremely likely to avoid resolution
and losses for senior bondholders, according to BNP Paribas
analysts. They expect the senior unsecured debt to move towards
If Veneto and Vicenza senior bondholders are let off the
hook, there are broader ramifications beyond two Italian
lenders, and it would be seen as a boon for the preferred senior
unsecured asset class.
"It shows that, even in banks with a very large capital
shortfall, preferred senior debtholders can be bailed out as
long as the government of the country where the bank is based is
willing to provide the public capital," the BNP Paribas analysts
Bank of America Merrill Lynch analysts went one step
further, questioning whether appetite for bail-in - the linchpin
of post-crisis regulation designed to protect taxpayers - is
In order to receive the state bailout, the two banks needed
to be deemed solvent - a condition that many in the market have
"If these banks qualify for an opt-out to senior bail-in,
it's hard to imagine circumstances when any other troubled bank
would need to be bailed in," the BAML analysts wrote.
This is positive not just for preferred senior bondholders,
but potentially investors in billions of so-called TLAC bonds
that the world's largest banks have raised in recent years to
create loss-absorbing buffers demanded by regulators.
Banks have been forced to pay a premium above traditional
senior debt to compensate investors for the greater risk of
potential losses, but doubts over whether bail-in will be
enforced could mean these bonds could be viewed as a bargain.
" ... depending on the full details, we would see the move
to spare senior bonds in these instances from bail-in as
extremely bullish for senior bondholders generally and any TLAC
related senior bonds in particular," the BAML analysts added.
Veneto and Vicenza's Tier 2 debt has also rallied this week,
though remains at extremely distressed levels and implies severe
losses for those bondholders.
Veneto's €200m 9.50% Tier 2 callable in 2020 jumped from 11
to 15.50 on Wednesday, up from a low of 12 last week. The
Vicenza €200m 9.50% Tier 2 callable in September 2020 is bid
around 15.50, up from 9.
(Reporting by Alice Gledhill, editing by Alex Chambers, Philip