June 7, 2017 / 2:56 PM / 4 months ago

REFILE-Banco Popular resolution taken in stride

(Refiles to add Stacey’s title and full name in penultimate para)

* 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 Investment Management.

“Some of Italy’s banks are under pressure while a bank like Co-op is at risk of deteriorating asset-quality.”

CALM WATERS

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 the day.

“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 Carnegie)

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