Bloomberg News

SNS Reaal Nationalization Triggers Jump in Junior Bank Debt Risk

February 01, 2013

SNS Reaal (SR) NV’s nationalization triggered a surge in the cost of insuring against default on European junior bank debt amid concern the move will encourage governments to impose losses on bondholders.

The Markit iTraxx Financial Index of credit-default swaps on the subordinated bonds of 25 banks and insurers jumped as much as 15 basis points, the most since Sept. 26, to a more than seven-week high of 265, according to data compiled by Bloomberg. The move was led by contracts on UniCredit SpA (UCG), which rose 14 basis points to 518.

The Netherlands moved to take control of SNS Reaal after real estate losses brought the nation’s fourth-largest lender to the brink of collapse. Dutch Finance Minister Jeroen Dijsselbloem said today that, while the government will “expropriate” SNS’s equity and subordinated debt, senior bondholders won’t be affected.

“There’s a trend of using sub bondholders to recover capital for bad banks around Europe,” said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc (RBS) in London. “After Ireland, there’s been Spain and now there’s Cyprus and Holland and there could be other cases going forward.”

Irish lenders imposed losses of as much as 90 percent on their junior debt investors as the government pledged 64 billion euros ($87.4 billion) to rescue them following that country’s housing collapse. Cypriot Finance Minister Vassos Shiarly said yesterday junior creditors will have to take losses in a proposed rescue of the country’s banks.

Monte Paschi

Credit-default swaps on the junior debt of Banca Monte dei Paschi di Siena SpA (BMPS) rose for a fifth day to the highest since November. The Italian lender is seeking state help to bolster its balance sheet after failing to meet capital requirements set by the European Banking Authority and faces a criminal probe into money-losing structured deals.

Contracts on the junior debt of ING Bank NV, the biggest Dutch financial-services company, rose 12 basis points to 210 and Intesa Sanpaolo SpA (ISP) increased six basis points to 418.

“These are not only problems for the Dutch banks and insurers but also for others in Europe,” said Bill Blain, a strategist at Mint Partners in London. “The bail-in of SNS should leave capital holders of other struggling European banks wondering.”

Credit-default swaps on SNS’s senior debt were quoted at 399 basis points, according to data provider CMA. The lender is not included in the credit-default swaps index or among the 1,000 most-traded companies tracked by the Depository Trust & Clearing Corp.

Junior Bonds

SNS’s junior bonds tumbled to record lows, with its 250 million euros of 6.258 percent Tier 1 perpetual notes quoted 25 euro cents, or 61 percent, lower at 15.5 cents, according to Bloomberg prices. Its senior bonds rose after the government said investors in these notes won’t face losses.

The Utrecht, Netherlands-based bank and insurer received a government bailout in 2008, two years after acquiring ABN Amro Holding NV’s property finance unit. .

SNS’s 301 million euros of 6.625 percent senior, unsecured bonds maturing in November 2016 rose 1.7 euro cents to 105.36, Bloomberg prices show. The Dutch lender’s 615 million euros of 0.285 percent senior floating-rate notes due June 2014 climbed 1 euro cent to 94.78 cents.

The subordinated financial index pared its advance after a report showed hiring increased in the U.S. in January after accelerating more than previously estimated at the end of 2012, and was trading at 255 basis points at 2:30 p.m. in London.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased three basis points to 150. The Markit iTraxx Europe Index of 125 companies with investment- grade ratings, including the 25 financial companies, rose 1.5 basis points to 114.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings climbed three basis points to 445. An increase signals deterioration in perceptions of credit quality.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

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


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