(Refiles to add Stacey's title and full name in penultimate
* Surprise move not enough to shake market confidence
By Helene Durand
LONDON, June 7 (IFR) - The regime to deal with failing
European banks cleared its first major hurdle Wednesday as the
market shrugged off the resolution of Banco Popular and the
wipeout of its subordinated debt.
After watching the bank wobble on the edge of insolvency for
months, regulators eased market jitters with a relatively swift
winding up of the Spanish lender.
The Single Resolution Board bailed in the sub debt, wrote
down the shares and Additional Tier 1 instruments, converted the
Tier 2 debt to new equity - and won wide praise for doing so.
"This was the first major test of the BRRD and it shows that
the decision system works," said Gerald Podobnik, global head of
capital solutions at Deutsche Bank.
Before the regulators took action, Popular's two outstanding
AT1 notes were quoted at a cash price in the 40/50s, while its
Tier 2 was quoted in the high 70s.
Those levels showed investors had not been expecting a
complete wipeout of the debt.
"The market seems to have been assuming that authorities
would prefer a compromise ... [rather than] resolution tools
being applied," said Podobnik.
"So it's good to see this happening and shows that the law
will be applied."
THE ITALIAN JOB
The move in Spain comes in contrast to the situation in
Italy, where regulators are still grappling with Banca Monte dei
Paschi di Siena, Banca Popolare di Vicenza and Veneto Banca.
The market had had doubts about Popular since at least
January, when the bank was forced to dip into reserves to ensure
it could pay coupons on its AT1 bonds.
Yet Popular never did miss a payment, and the decision to
wipe out its sub debt and impose steep losses on bondholders
jumped the sequence of events that some were expecting.
"We'd have expected to have had a missed coupon before we'd
have seen a write-down of an AT1," wrote Eoin Walsh, partner and
portfolio manager at TwentyFour Asset Management.
"Popular never missed a coupon on its AT1s, and in that
regard we are surprised."
And given its relatively healthy capital levels, regulators
could find themselves at pains to explain the rationale for
taking action just now.
Popular's AT1 had been meant to trigger and convert into
equity should the bank's capital ratio fall below 7% in the case
of the 8.25% AT1 or 5.125% in the case of the 11.5% issue.
But Popular's total capital ratio was well in the safety
zone, standing at 11.91% at the end of the first quarter.
"What happened at Popular has a negative read across for
institutions like Vicenza the German Landesbanken as
well," said Filippo Alloatti, a credit analyst at Hermes
"Some of Italy's banks are under pressure while a bank like
Co-op is at risk of deteriorating asset-quality."
Still, many will see the situation as final proof that
Additional Tier 1 and Tier 2 instruments can effectively be used
as capital - a key confirmation in the wake of the last crisis.
By using the BRRD's asset sale tool, the SRB and Spain were
able to resolve the matter of Popular without having to inject
any state money.
It also means that the state will not have to wind the bank
down, as the healthy part of the business has now been absorbed
by Santander, which bought Popular's new shares for a token €1.
And unlike in 2016 - when the threat of Deutsche Bank
missing a coupon payment sent the market in a tailspin - the
resolution of Popular has hardly caused a blip.
Subordinated European bank bonds dipped initially Wednesday
but rebounded quickly, while the region's bank stocks are up on
"Instead of having a situation that drags on, they've
cleaned up a problematic bank in one shot," said Marc Stacey,
portfolio manager at BlueBay Asset Management.
"The market is reacting as it should," he said. "This shows
you it's working very well."
(Reporting by Helene Durand; Editing by Alex Chambers and Marc