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Veneto, Vicenza saga sows seeds of doubt over bail-in risk
April 5, 2017 / 11:44 AM / 6 months ago

Veneto, Vicenza saga sows seeds of doubt over bail-in risk

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 bonds.

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 par.

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 wrote.

BARGAIN HUNTING?

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 waning.

In order to receive the state bailout, the two banks needed to be deemed solvent - a condition that many in the market have questioned.

“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 Wright)

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