Basel III rules on minimum capital ratios announced

- "The release of the Basel III rules on new minimum capital requirements was the dominating news in the credit market this week. The rules were slightly less tough than was stated in press reports last week and consequently financial spreads performed well. Of particular interest to the subordinated debt market is the transition rules concerning bank capital. Essentially, extension risk has been reduced for hybrids – especially those with step-up coupon features – and on the back of this we saw a massive rally in the Tier 1 market. The rally was partly halted after the market became aware of certain possibilities for some issuers to make calls of outstanding bonds by 2013 in case these bonds no longer qualify as regulatory capital. This was particularly the case for highcoupon bonds trading above par. For a further description of the new rules, see below."
- "On the back of the confusion on whether to call or not to call hybrids and at what date, it seems that Abbey (owned by Banco Santander) is not calling an outstanding UT2. We think that ongoing uncertainty over how to design subordinated debt instruments such that they comply with Basel III requirements will make issuance limited in the short term. Against this background, it is perhaps not surprising that some banks opt not to call outstanding sub debt, as the ability to substitute it is uncertain. Therefore, in our view it is possible that more banks will follow in the footsteps of Santander (which is one of the major market players, after all), especially on UT2 instruments where there is no amortisation of capital after the first call date."

DenDanske Weekly Credit Update 20100917