Nationalised Anglo Irish Bank's pledge yesterday to continue paying interest on its debt lifted prices among the lowest-ranking bank bonds, but the battered market's ultimate fate still lies in the hands of regulators.
The promise from the Irish lender, nationalised on January 15th in a drastic step aimed at preventing its collapse, soothed fears that regulators might interfere with its interest payments in the way European Commission did with Bayerische Landesbank.
The pledge prompted a rally in low-ranking Tier 1 debt yesterday.
We consider this news as positive for Anglo Tier 1s and the Tier 1 market in general," BNP Paribas credit analysts Olivia Frieser and Axel Swenden said in a note.
"It shows that, even for Tier 1s (excluding preference shares), in a nationalisation scenario, the message from the government is that decisions are taken as they were before."
Tier 1 debt has equity-like features with perpetual or very long maturities, and is last debt instrument in the queue for repayment, behind Upper Tier 2 and Lower Tier 2, the other two tranches of subordinated debt.
But analysts still kept a wary eye on regulators, who effectively rule the market now that governments hold an increasing sway over Europe's banking sector.
Deutsche Bank credit analyst, January Carmalt, said that Britain's Financial Services Authority's credibility "would be shot to pieces" if it told UK banks not to pay coupons on step-up hybrid Tier 1 bonds.
"It would cause further systemic panic across the financial system if they did that," Carmalt said on a conference call yesterday.
The market sell-off in subordinated bank debt accelerated late December after the European Commission told Bayerische Landesbank not to pay a coupon under certain conditions, in return for its approval for a capital injection from the German State of Bavaria.
Some European Tier 1 bank debt spreads have widened by more than 1,000 basis points over the past seven weeks.
Anglo Irish Bank reassured investors this week that it plans to cover coupon payments and pay back principal at maturity, even though it has been nationalised.
"Although Anglo doesn't know for sure whether the next coupon will be paid, it was good to hear that they still have every intention of paying it," one trader said.
"Of course that may change and the regulator may step in like they did with BayernLB ... but it's positive because they could have turned around and said there aren't any buyers and that the market has gone forever," he added.
The news gave the subordinated bond market a lift.
Reuters