Wednesday, June 7, 2017

Bail-ins are back in vogue as one insolvent Spanish bank takes over another while CoCo bond holders lose 97% of value

It has been four years since the concept of a bail-in, or the using of customer deposits and assets to recapitalize a bankrupt financial institution was first used in Cyprus, but on June 7 the second one in the Eurozone has now taken place as CoCo (Contingent Convertible) bondholders of the Spanish bank Banco Popular just received their own haircut of more than 97% as the bank was taken over by another well known insolvent institution.


Last night the European Central Bank's 'Single Resolution Mechanism' agreed to allow Santander to purchase Banco Popular for just one Euro, and will be allowed to draw funds from the ECB to help recapitalize its new asset.  And ironically this move will allow Senior debt holders to be protected on the positive side of the bailout, but leave CoCo bond holders with nearly nothing as their bonds are more than likely to be converted into bank shares at extremely discounted prices.


There is a rule in Financial Institutions that any bank that calls itself “popular” generally isn’t. This was proved last night. But, congratulations if you were a holder of Spain’s Banco Popular’s Senior Debt – they did a Zebedee “boing!” on the basis last night’s last minute Santander rescue makes the bonds money good. 
Bad news for the Equity and COCO AT1 holders – who have the distinction of holding the first major bank capital bonds to be bailed-in/wiped out under EU regulations. Banco Popular senior debt is 12 points higher this morning. 
The AT1 perps are trading at 2.6%, down 50 points!!,and even that price looks optimistic. Ahah. We’ve not seen crashes like that since 2008. 
The Single Resolution Board agreed the sale of Popular for One Euro to Santander. Santander will launch a Euro 7 bln rights issue to recapitalise the bank, but that’s not a massive ask for Popular’s business. At one time Pop was the top Spanish bank – a great SME platform, strong retail business and solid management. Now it’s just another name to be restructured and synergised (is that a word?) into the maw of Santander. - Zerohedge
Oh, and who was protected during this bail-in, and subsequent takeover of Banco Popular?  Germany of course, who holds the majority of senior debt positions on the Spanish banks, and who the ECB is really there to protect over all others in the biggest dirty little secret of the Eurozone project.

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