London: Royal Bank of Scotland will not exercise options to redeem more than $1.5 billion of subordinated bonds next month after regulators blocked using state aid to repay investors in the bank’s low-ranked debt.
The action by Royal Bank, 70% owned by the UK government, shows how regulators and policymakers are trying to ensure investors bear some of the cost of bailing out troubled banks.
The decision was taken in consultation with the European Commission, which has stated that, where possible, banks receiving government cash should not use this to make payments to their investors.
“Although it is the Financial Services Authority which officially objects to these calls (repayments), the decision has been taken in consultation with the European Commission,” ING credit analysts said in a note to investors.
“A sell-off of LT2 (Lower Tier 2) bonds issued by banks which have submitted a restructuring plan will be seen on today’s news,” they said.
Five-year credit default swaps on Royal Bank of Scotland subordinated debt widened by around 20 basis points to 325 basis points, a trader said.
Five-year CDS on RBS senior debt widened by around 6 basis points to 131.50 basis points, according to Markit data.
The Markit iTraxx five-year subordinated financials index was 2 basis points wider at 177 basis points, he trader said. The index had widened by more than 5 basis points soon after the RBS announcement.
More to follow?
“The concern is could other UK banks be forced to follow suit by the regulator,” credit strategists at BNP Paribas said. “However, the general feeling is that the reaction could mellow out as these are in fact relatively small issues.”
RBS’s four bonds are: two Upper Tier 2 notes for €400 million ($570.8 million) and €100 million and two Lower Tier 2 notes for 590 million Australian dollars ($495.8 million) and 410 million Australian dollars.
Future decisions by Royal Bank on whether or not to redeem bonds will also be subject to consultation, the bank said.
“As well as circumstances (economic or other) prevailing at the time, pending the European Commission’s decision on RBS’s restructuring plan,” RBS said in a statement.
Brussels’ attempts to spread the burden of bank bailouts to shareholders and holders of higher-risk subordinated bank debt has had mixed results.
The Commission ruled last year that Germany’s BayernLB could not pay out any interest on a Tier 1 bond, which ranks just above equity, as a condition for approving billions of euros in state aid.
The EC also told Anglo Irish Bank recently not to pay interest on Tier 1 bonds.
In August, Belgian bancassurer KBC said it would not pay interest on a Tier 1 bond pending regulatory approval of a restructuring plan and after discussions with the European Commission.
But earlier this week, the Belgian bank said it would pay coupons after all on certain outstanding Tier 1 bonds, reversing its earlier move.