2nd UPDATE: Banks Back In Riskier Subordinated Debt Markets

17th Jun 2010 13:15

(Adds comment, background) By Michael Wilson and Art Patnaude Of DOW JONES NEWSWIRES LONDON (Dow Jones)--European banks stepped back into riskier debt markets Thursday, as Deutsche Bank AG (DB) and Standard Chartered Bank (STAN.LN) broke the subordinated bond drought with the announcement of new lower-tier 2 bond issues. Deutsche's self-led, EUR1 billion, 10-year bond priced at a spread of 210 basis points over the risk-free mid-swaps rate, with Standard Chartered's similar 10-year, dollar-denominated bond expected to price in the region of 200 basis points over treasuries, via lead managers Credit Suisse, Standard Chartered and Goldman Sachs. Ben Bennett, credit strategist at Legal & General Investment Management in London said it's interesting that the banks have decided to reopen the subordinated market with lower-tier 2 deals rather issue senior bonds. Lower tier 2 bonds rank below senior debt in a bank's capital structure. The holders of these notes have a lesser claim on the issuer's assets in the case of bankruptcy. So far this month, banks have only sold senior bonds and most of those have been short-dated, floating-rate notes, typically considered defensive because they limit investor exposure and provide protection against interest rate movements. Since the start of the year, banks have only sold EUR6.7 billion of subordinated bonds, partly due to the risk aversion created by the sovereign debt crisis and partly on regulatory uncertainty surrounding the treatment of subordinated bank debt. In response to the global financial crisis, regulators want to make the core capital banks hold against risky assets more like stocks. Because equity can be written down, it tends to absorb losses more effectively. As lower tier 2 debt does not absorb losses in this way, there were some fears that regulators may exclude these assets from counting towards regulatory capital holdings. However, L&G's Bennett said that, under proposed changes to bank capital regulations, also known as Basell III, banks will still get credit for lower tier 2 debt securities as so-called "gone concern capital" which provides protection for depositors in the event that the issuer goes into liquidation. -By Michael Wilson and Art Patnaude, Dow Jones Newswires; +44 (0) 207 842 9259; [email protected] (Alessandro Pasetti and Mark Brown in London contributed to this article.) (END) Dow Jones Newswires June 17, 2010 08:15 ET (12:15 GMT)