Dec. 1 (Bloomberg) -- The European Union’s plan to exempt bank bonds issued before 2013 from taking losses at failing lenders probably won’t persuade investors to buy their debt, said analysts and investors including Paul Owens at Avoca Capital Holdings Ltd.
The proposal is designed to prevent lenders’ funding costs from rising, according to a person familiar with the plan who declined to be identified because the discussions are private. Short-term debt and derivatives should only be written down by regulators as a last resort, according to a draft of so-called bail-in proposals seen by Bloomberg News.
“I don’t see how this changes things,” said Owens, the co-head of research at Avoca Capital in London, which manages about $8.2 billion. “The issue is all about where the capital comes from in the next 18 months. There is little here that can restore investor confidence and that is what is in woeful supply.”
Regulators’ plans to ensure creditors of failing lenders take losses before taxpayers have combined with Greece’s flirtation with default to spook buyers of financial company bonds. The average yield on bank debt in Bank of America Merrill Lynch’s Euro Corporates, Banking Index is 6 percent, up from 4.2 percent at the start of the year.
“This is policymakers spraying foam on the landing strip,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “They are increasing access to liquidity in case a bank needs to do an emergency landing. But liquidity alone is not a solution.”
Bank sales of senior unsecured bonds evaporated in the second half of the year amid investor concern Europe’s sovereign debt crisis may cause some lenders to default on their debt. Funding channels in the U.S. money markets have also dried up as prime funds cut lending to Europe’s financial system, according to Fitch Ratings.
While the proposals may make it easier for lenders to raise funds, they are unlikely to revive issuance, said Roger Francis, a strategist at Mizuho International in London.
“This is a helpful structural clarification,” he said. “It doesn’t mean that banks are going to steam into the market and issue loads of bonds next week.”
--With assistance from Jim Brunsden in Brussels and Ben Moshinsky in London. Editors: Andrew Reierson, Michael Shanahan
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