A hot new bail-in-able debt cooked up by financial engineers in France

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware…

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

Put simply, if a bank is resolved, holders of these instruments could lose much or all of their money, similar to stock holders. According to Olivier Irisson, executive chief financial officer at Groupe BPCE, France’s second largest bank, it’s a “very good compromise for investors and banks.”

Judging by how they’re selling, yield-starved investors seem to agree. After the new bonds were rubber stamped by the Banque de France in mid-December, investors gobbled up €1.5 billion of Credit Agricole’s senior non-preferred 10-year bonds despite only receiving about 45 basis points more than they would get on traditional senior debt and about 65 basis points less than on subordinated…..more here