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Caixa Geral Pays a High Price For Inconsistent Regulation

24 March 2017 by Gary Kirk

This week Caixa Geral de Depositos, a leading state-owned Portuguese retail bank issued a €500m perpetual additional tier 1 issue (with a 5-yr call). The price they had to pay though was very high, with the coupon eventually being set with a substantial 10.75% coupon. Why so high?

In terms of credit metrics Caixa Geral is not the strongest bank in the eurozone and is still challenged by a weak domestic economy, but in a world where yield remains a scarce commodity it was somewhat surprising to see such a high coupon. Additionally, one could argue that it was too soon to invest in a bank that is still undergoing a €5bn restructuring plan whereby the Portuguese Government had to inject €1.4bn just three months ago and the European Commission has only recently lifted the suspension of Caixa’s discretionary coupon payments (presumably to allow the AT1 issue to succeed). It is currently undertaking an additional €2.5bn capital increase which, together with the AT1 deal, will raise the CET1 ratio from just 5.5% to 11.6%. All that said, worse deals have priced with lower coupons. For us though, the decision not to invest came even before the credit story, and we presume other fixed income investors will have faced the same problem that we did. Basically we could not trust the Central Bank of Portugal following their actions surrounding Novo Banco; we think this probably had a material impact on the pricing of Caixa Geral’s new issue, and we presume this will weigh heavily over all Portuguese bank deals until the issue is resolved.

To refresh your minds on this point:

In December 2015 we wrote an article on the decision of the Portuguese Central Bank to allow the selective transfer of five senior unsecured bonds from Novo Banco into Banco Espirito Banco, to improve the capital ratio of Novo Banco. We continue to view this decision to selectively impair some bond holders over others as a clear disregard for one of the basic founding doctrines of capital markets, i.e. the principle of pari passu. To us this is something that needs protecting and should be adhered to for the benefit of all investors. On reading through the terms of yesterday’s AT1 bond issue I did have a wry smile on my face when I came across the ‘special event redemption’ section that states “subject to approval from the Competent Authority” which seems a bit ironic given the actions of the same Portuguese authorities towards international investors back in December 2015. It is exactly those international investors that the Portuguese Central Bank are relying on for supporting this new deal and boosting the capital ratio of this state owned entity.

We wonder how much tighter this issue may have been had it not been for the previous actions of the Central Bank, but whatever that answer may be, we feel it would be hypocritical for us to invest in any Portuguese sovereign or bank transactions until the authorities right what we consider to be their previous wrongdoing.

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