ABN Amro looks at €2.8bn bond swap
By Jennifer Hughes
Published: April 13 2011 19:13 | Last updated: April 13 2011 19:13
ABN Amro is seeking to exchange up to €2.8bn of junior bonds in a deal that underscores banks’ growing efforts to improve the quality of their capital ahead of tougher new regulations.
The bank is offering to swap six existing bonds for two new 10-year notes in the latest example of banks’ attempts to bolster their total capital before they even officially begin the transition to new, tougher requirements, known as Basel III, in January 2013.
Although the exchange will not affect the bank’s core equity ratios, it will help with broader measures of total capital that Basel has also demanded. In addition to equity, these measures allow some junior, or hybrid, bonds with equity-like features such as the power to defer interest payments, to count towards capital.
ABN Amro’s deal follows a handful of similar offers from Commerzbank, among others. Bankers expect many more of these deals in the run-up to 2013 because of a boom in hybrid bond issuance as the credit bubble reached its peak in 2006 and 2007.
Most of the bonds were issued as 10-year notes, but with the discretion for the bank to “call,” or repay, them after five years.
Under Basel III, junior bonds with pre-2013 call dates cannot count at all towards capital after 2012 regardless of their final maturity, meaning banks with large amounts of the bonds must act soon to bolster their position or face weaker capital ratios.
“The primary rationale for the exchange offers is for the issuer to efficiently manage its tier two capital in light of the transition to Basel III,” the bank said on Tuesday.
Banks had traditionally sniffed at such so-called liability management, which is in essence a form of capital restructuring.
But since the financial crisis, “LM” trades have become relatively common, from debt buy-backs to exchanges of existing bonds for new, longer-term debt, or even equity.
ABN Amro is offering to swap its existing bonds at between 96.5 per cent and 97 per cent of their face value, offering a slight premium to their current trading levels in a bid to encourage investors to take up the deal.
As a rule of thumb, anything above a one-third take-up would be considered a success. The yields on the new bonds will be announced on Monday and the exchange deadline is next Wednesday.
Credit Suisse and Bank of America Merrill Lynch are jointly leading the deal.