UPDATE 2-Unicredit’s new hybrid braves Basel uncertainty

* Unicredit makes bold move despite regulatory fog

* Tier 1 bond has temporary write-down feature

* Nearly 9 billion euros of Tier 1 “callables” falling due

By Jane Merriman and Gabriella Bruschi

LONDON, July 13 (BestGrowthStock) – Italy’s Unicredit (CRDI.MI: ) on
Tuesday unveiled a new form of hybrid Tier 1 bond before
regulators spell out what they want European banks’ capital to
look like and before bank stress tests show how much they need.

The deal is also a positive signal that shows a revival of
investor appetite for higher-yielding bank securities that could
spur other banks to follow.

“If we see a rally in the Tier 1 space on the back of this
deal, other issuers might decide to take advantage of this
window,” said one debt capital markets banker not involved in
the issue.

The Italian bank’s subordinated Tier 1 bond is only the
third deal this year because banks have been reluctant to issue
them due to uncertainty over new capital rules being devised by
regulators. [ID:nLDE65L1H2]

The Basel Committee of central bankers and supervisors meets
this week (July 14-15) to try to finalise the new rules, which
aim to boost banks’ defences against future crises.
[ID:nLDE6640P8]

Europe’s banks are also undergoing stress tests in an
attempt to improve confidence in the sector. [ID:nLDE66C088]

The bond market has reopened for “core” European banks this
month, with a string of new deals [NEW/EUB]. But the market is
still difficult for banks from “periphery” countries, a
situation the stress tests aim to remedy.

LOSS ABSORPTION

“Unicredit shrugs off all the paralysing unknowns and
insecurities and announces a Tier 1 security, with a traditional
call and step-up feature after 10 years,” ING credit strategist
Jeroen van den Broek said in a note.

“The securities will also have loss absorption features. In
essence, if the bank’s capital ratio falls below 6 percent, the
notes will be written down, pari passu and pro-rated with the
issuer’s non-consolidated Tier 1 capital.”

Financial regulators have voiced disquiet about bank’s
hybrid capital not directly absorbing losses during the credit
crisis and want them to have new features such as write-downs.

Unicredit’s 500 million euro ($629.8 million) issue is set
to have a coupon of around 9 percent, according to sources close
to the deal.

REGULATORY CALL AT PAR

The bank can choose to redeem the bonds at par if they do
not qualify when new capital regulations come into effect.

Proceeds from the deal are likely to be used to meet
redemption of outstanding hybrid bonds coming up in the autumn,
bankers said.

Hybrid Tier 1 bonds have equity-like features, which means
they can count towards a bank’s capital. Issuing hybrid debt is
not only non-dilutive, but also a cheaper form of capital than
equity because interest payments are tax deductible.

Banks became heavy issuers of hybrid Tier 1 bonds in 2000 to
support balance sheet expansion.

Bankers estimated there are about 8.5 billion euros of
“calls” or redemptions of Tier 1 bonds coming up from September
to the end of the year. “You could see about 10 bank deals
before the end of the year,” said one debt capital markets
banker.

(Editing by David Cowell)

UPDATE 2-Unicredit’s new hybrid braves Basel uncertainty