Fri Mar 20, 2015 1:03pm EDT
* Proposed changes would push senior debt down
* Reaction in senior debt sector muted so far
* Some worry about challenge to property rights
By Alice Gledhill
LONDON, March 20 (IFR) - Market opinion is divided over the importance of proposed German legislation that would effectively force senior bondholders down the credit capital structure when a failing bank is resolved.
"What the lawmakers have done is effectively put in a clause that clarifies the creditor hierarchy for senior debt and sets out clearly that senior debt is below derivatives and structured notes when it comes to resolution," said one debt banker.
"It gives a very practical bail-in hierarchy," the banker said. "It makes sense to exclude things like corporate deposits and derivatives."
Under the Bank Recovery and Resolution Directive (BRRD), derivatives can be bailed in but may be excluded at the discretion of the resolution authorities.
The amendments to the German Banking Act may also offer an advantage by helping to bring the country into line with incoming regulatory requirements around loss-absorbing buffers.
"The idea of TLAC [total loss absorption capacity] is that you separate out the various operating liabilities that are entangled with senior unsecured debt," said Simon McGeary, head of European new products at Citigroup.
"In Germany, all senior unsecured debt would automatically be subordinated to those," he said.
The changes could mean that banks will not issue as much sub debt as some were planning in order to meet TLAC requirements.
"Tier 2 could do well out of this as some banks may need less than they'd anticipated," McGeary said.
FAIR OR NOT
The changes are unlikely to be enacted before late summer, leaving time for market participants to lobby against some of the terms.
That the law would apply retrospectively to outstanding debt poses difficult questions about the limits of state interference in private property rights, according to Kai Schaffelhuber, a partner at Allen & Overy.
"They may need to provide for a phase-in provision so only liabilities issued after implementation are affected," he said.
"There are also certain instruments, such as certificates of indebtedness (Schuldscheine) and registered bonds (Namensschuldverschreibungen), that are clearly wholesale instruments, that are not affected," he said.
"They will need to ask whether there is unequal treatment."
So far, reaction to the proposals in the senior debt segment has been relatively contained.
Deutsche Bank's March 2025s have widened around 8bp since Monday, but this is not out of step with the widening seen across some other senior bonds.
Other German senior paper, such as Commerzbank's September 2020, is flattish to a touch wider.
One investor was relatively sanguine about the significance of the changes: "In theory the loss you would take would be greater, but there are such enormous buffers now."
But bankers said there was a rising sense of concern among other investors as awareness around the issue grows.
"It is forcing investors to reassess senior risk in general," said one syndicate official.
Citigroup's McGeary said the impact on the ratings of German senior debt remains to be seen.
"With the German approach, there would be less debt beneath you or alongside you, so German senior ratings could be lower than some peers on a like-for-like basis."
While banks may save costs on reduced Tier 2 issuance, the price of their senior funding could increase as it suffers in comparison to that of other jurisdictions.
"There will be some pressure by the German banks to have it approved in other countries, as they will be at a massive funding disadvantage," the syndicate official said. (Reporting by Alice Gledhill, Editing by Alex Chambers, Marc Carnegie, Julian Baker)
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