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Banks' CoCo plans in jeopardy as ECB tightens regulatory grip
[London] European banks could face prolonged delays in raising loss absorbing capital once the ECB becomes the region's single supervisor and increases its scrutiny of the CoCo market.
Although details have yet to be finalised, banks from November onwards are expected to need two rounds of consent to sell Additional Tier 1 bonds - from their national regulator and also from the ECB's Single Supervisory Mechanism (SSM).
This will be unprecedented for European banks, which up until now have only had to get the nod from national authorities, and could push Additional Tier 1 bond projects pencilled in for this year into Jan 2015. "It will take some time for the SSM to get up to speed with the Additional Tier 1 market, so we have no idea how long it will take," said a banker.
The SSM was created as part of Europe's banking union and will be the region's central prudential supervisor for financial institutions.
Dutch banks could be among the victims of the new regime. They were expected to issue their first Additional Tier 1 bonds before the end of the year, as the legislation making these instruments efficient to issue from a tax perspective is expected to be passed in November. "We would have expected the first deal to come in the second half of that month, as the country's banks are just waiting for approval and then they're ready to go," said a DCM banker.
However, the Dutch, like all other eurozone banks, will have to receive consent from the ECB, which makes that November timeline seem unlikely.
Signs of increased scrutiny of the CoCo market at the European level were clear this week, when the European Banking Authority (EBA) released a paper pointing to the dangers of these instruments. One banker said this indicated that the EBA could take over as the future gatekeeper of the market.
Temporary calls, variable triggers, conversion mechanisms, contingent clauses and covenants were just some of the issues highlighted by the EBA, which is continuing to monitor the risky market.
Getting the stamp of approval from national regulators can be a lengthy process. In the UK, for example, banks are expected to give the FCA 30 days notice.
While the process is not as formal on the continent, bankers say that now that the SSM is involved, banks need to allow for even more time before they can raise a bond. "I think investors are going to be disappointed by the amount of supply we see from banks after the AQR," said a debt capital markets banker.
For banks that are looking to issue in the coming weeks, conditions are far from favourable. Order books for recent deals from the likes of Nordea, Santander and UniCredit have shrunk as certain accounts refused to buy deals at aggressive levels. "A lot of investors thought there would be more supply coming, so when guidance was revised tighter, they refused to chase the deal," said a banker.
This lack of demand and general risk-off tone in the market has dragged down the cash prices on CoCos.
Bonds from banks like Societe Generale have dropped by as much as eight points in cash terms, while Santander and UniCredit's recent offerings have still not recovered to par. "The whole market is pretty terrible still," said a DCM banker. "There will be delays from the SSM but I think in general we won't see much until we get a bit of stability," said another banker.