November’s proposal to harmonize bank creditor hierarchy in Europe seems to have already become mired in that most European of delays: political infighting.
|
Kapil Damani, |
Although the plans were announced as part of the 2016 EU banking reform package, their actual implementation could be held up for months as Germany pushes back against the initiative.
Under current proposals the legislation is due to be in place by July 2017. The way things are going it looks more like July 2018.
The problem stems from the fact that the European Council, European Commission and the European Parliament all need to be happy with their position on the proposals before a trial of the asset class can begin.
While the Council’s working party has had several discussions in Brussels on the matter, the European Parliament still seems to be a long way from agreement. This is partly because this proposal (article 108) is part of the much larger banking package which incorporates the leverage ratio, the net stable funding ratio and the review of the trading book. Many MEPs disagree that article 108 should be fast-tracked on its own.
There is also significant pushback from Germany on the proposals. This is hardly surprising as the country’s decision to subordinate senior bonds to other senior unsecured liabilities in March 2015 was a neat solution to the problem. The retroactive approach has meant that most German banks are TLAC/MREL compliant already, and they now need to be clear on the rules governing further issuance.
“In Germany, if a bank has fulfilled its TLAC and MREL requirements already, it can issue new senior, senior debt,” points out one Frankfurt-based lawyer. The European Commission has proposed grandfathering senior German bank debt issued before December 2016, but that is unlikely to be sufficient to quell dissent.
The July 2017 deadline is a farce - Lawyer
Predominantly German opposition means that harmonized bank creditor hierarchy legislation is unlikely to be in place by the summer.
“The July 2017 deadline is a farce,” says the lawyer. “In the interim period issuers can use flip clauses. Under the French solution, senior non-preferreds can be triggered in the documents which is in line with BRRD. Under the German solution, there is no opt out, but this has not been tested. So for the time being there are two forms of non-preferreds.”
The European Commission has recently spelled out the grounds for an expedited treatment of the bank creditor hierarchy proposal, emphasizing the risk to bank compliance deadlines if the rules are not fast-tracked, along with the accentuation of the current uneven playing field for banks and investors, and the fact that the longer it takes, the harder it will be.
It wants Council’s working party to have a general approach ready to go by May this year. If no common position can be reached, countries will have to adopt intermediary legislation, before the finalization of legislation at EU level.
The longer the political stalemate persists, the more important it is for European banks in jurisdictions where the rules are not yet clear to find flexible ways to issue in the interim.
“Outstanding debt is treated in line with national law for everything issued up to December 31, 2016, but the interim period may create uncertainty, particularly for states with no legacy laws,” says the lawyer.
“It is not clear whether they can implement changes before July or apply grandfathering. It is also not clear whether outstanding and new debt will rank pari passu.”
Deals
Banco Santander addressed this problem in January when it issued €1.5 billion senior non-preferred notes, dubbed second ranking senior notes, for which investors had to irrevocably accept that they would rank below senior secured creditors in the event that Spain adopts the EU rules. The deal was lead managed by Barclays, HSBC, Natixis and Santander.
Danish mortgage lender Nykredit Realkredit, which had already issued €1 billion of contractually bail-inable debt last summer, issued a further €500 million of 3.25 senior resolution notes out of a new €5 billion EMTN programme in March through BAML, BNP Paribas, JPMorgan and Morgan Stanley. It has also modified the terms of its outstanding notes, enabling them to flip into the new EU non-preferred asset class if, and when, Danish law implements it.
“We wanted to make sure that issuer could still benefit from European developments,” explains Kapil Damani, global head of the capital products team at BNP Paribas. “We wanted to build flexibility into what they issue today and what they have issued in the past.”
Nykredit did not need to seek noteholder consent to change the documentation.
“Issuers want to be part of a liquid asset class,” he says. “They can flip into non-preferred as an alignment event, as long as it is not prejudicial to investors. Investors today are quite happy owning what they have, but flipping to non-preferred might improve their position as the asset class will be much deeper.”
Damani believes that if the delay to EU legislation is prolonged then this solution could become widespread among larger European lenders.
“This technology is very relevant for an issuer that wants to reduce its MREL gap,” he tells Euromoney. “It is most relevant for G-Sibs that have hard TLAC deadlines. If you are a European issuer with a sizeable MREL gap, this technology allows you to address that before European legislation is in place.”
