Bloomberg News

BNP’s Bond Tender Stokes Non-Call Concerns, Morgan Stanley Says

November 20, 2011

Nov. 18 (Bloomberg) -- BNP Paribas SA’s offer to holders of of about $10 billion of junior bonds to sell or swap their notes for senior securities shows “a lack of generosity” that “confirms a worrying trend,” according to Morgan Stanley.

BNP is offering a premium that’s “far less generous” than tenders in previous months, analysts including London-based Natacha Blackman said in a client note. The offer also raises the prospect that the bonds won’t be redeemed on their call date, the analysts said.

France’s biggest lender is one of seven European banks offering to buy back or exchange bonds included in about $30 billion of junior debt issuance, to boost capital and raise money as borrowing costs rise. A tender by Banco Santander SA also stoked fears that the Spanish lender won’t call other junior notes.

“BNP’s liquidity management exercise is potentially another creeping non-call,” the Morgan Stanley analysts wrote. “Recently announced tenders and exchanges by national champions open the door for other issuers to follow suit with equally slim premiums.”

Banco Santander asked holders of 6.8 billion euros ($9.2 billion) of subordinated bonds to swap their securities for new senior notes at a rate of 87 percent to 99.5 percent on Nov. 15, according to a regulatory filing.

Record Spread

The yield premium over benchmark government debt that investors demand to hold Banco Santander’s 450 million euros of 6.5 percent subordinated notes due 2019 jumped to a record 1,198 basis points yesterday, according to Bloomberg Bond Trader prices. The spread was 369 basis points at the beginning of May. A basis point is 0.01 percentage point.

The Association of British Insurers formed a committee to challenge the terms of the Spanish bank’s tender, the Daily Telegraph reported yesterday, without saying where it got the information. An ABI spokesman declined to comment when contacted by Bloomberg News.

“The extreme case is the Santander exchange,” said Pilar Gomez-Bravo, a senior adviser at Negentropy Capital in London, which oversees about 200 million euros of securities. “It’s very punitive for investors, with current senior levels indicating a drop of over 10 points on the new issue.”

A Banco Santander spokesman in Madrid, who declined to be identified citing bank policy, said in an e-mail that the lender would decide whether to call subordinated bonds depending on the economic impact of a redemption as well as prevailing market conditions. Paris-based BNP spokeswoman Isabelle Wolff didn’t return a phone message and an e-mail seeking comment.

Capital Gain

The bond tenders that started in Europe this week allow the banks to repurchase subordinated notes at a discount, booking a capital gain, or swap the securities to raise senior debt. Others pursuing the strategy include Northern Rock Asset Management Plc, the so-called bad bank spun off from the lender being purchased by Richard Branson’s Virgin Money Holdings U.K. Ltd., and Societe Generale SA.

European banks will need to increase their buffer against losses, or capital, by 106 billion euros under tougher rules being introduced by the European Banking Authority to counter the economic crisis. The tenders are also a useful funding tool after the extra yield investors demand to hold senior bank bonds instead of government debt jumped by 90 percent since mid-year.

Bank Bonds

Senior European bank bond spreads widened to 365 basis points more than German bunds, from 192 basis points on June 17, according to Bank of America Merrill Lynch’s EUR Corporates, Banking index.

BNP offered to exchange or repurchase its junior notes yesterday for as little as 72.5 cents on the dollar, according to a series of statements.

SocGen, based in Paris, said today it will buy back as much as 900 million euros of a total $8.2 billion of Tier 1 notes at prices starting at 56 percent of face value. Dutch lender SNS Bank BV announced a tender of Lower Tier 2 notes yesterday, and nationalized U.K. lender Bradford & Bingley Plc is also repurchasing debt.

“Banks are currently taking advantage of poor liquidity in the market to buy back, or more often exchange, redundant capital instruments on very attractive terms for the issuer,” said Mark Harmer, an analyst at ING Groep NV in Amsterdam. “It’s definitely a growing trend, especially where traditional access to senior funding channels is limited.”

--With assistance from Hannah Benjamin, Ben Martin and John Glover in London. Editors: Paul Armstrong, Michael Shanahan

To contact the reporter on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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