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1 Corporate Hybrids: The Last of its Kind? Max Jacob Head of DCM Bond Solutions2 The Market - Asset Price Performance ov...
Corporate Hybrids: The Last of its Kind? Max Jacob Head of DCM Bond Solutions
Corporates & Markets | Corporate Finance | Munich | November 2011
The Market - Asset Price Performance over the Past Five Years Euro STOXX 50
iBoxx EUR Sovereigns
120
120
100
100
-59.6%
80
80
60
60
40
40
20
20
0 Jan-07
Jan-08
Jan-09
Jan-10
0 Jan-07
Jan-11
iBoxx EUR Non-Fin Subordinated
120
100
100
-34.3%
60
40
40
20
20 Jan-08
Jan-09
Jan-10
Jan-09
Jan-10
Jan-11
80
60
0 Jan-07
Jan-08
iBoxx EUR Tier 1
120
80
-10.4%
Jan-11
0 Jan-07
-77.2%
Jan-08
Jan-09
Jan-10
Jan-11
Source: Markit, Bloomberg | 01.01.2007 = 100
Corporates & Markets | Corporate Finance | Munich | November 2011
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A Closer Look at Bank and Corporate Hybrids Price development of bank and corporate hybrids 120
Key reasons for the decoupling Sovereign debt crisis
115
- Corporates as “safe haven”
110
- Banks’ significant holdings in government debt 105
Bank sector changes 100
- Basel III
95 90
- Resolution regimes / bail-in
85
Current hybrid performance
80
- Selected ongoing deferrals for banks
75
- Selected principal write-downs
70 Jan-10
Jul-10
Bank Hybrids (Tier 1)
Jan-11
Jul-11
- No exercise of calls
Corporate Hybrids
Source: Markit, Bloomberg | 01.01.2010 = 100
Corporates & Markets | Corporate Finance | Munich | November 2011
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Pricing Comparison New Issues Coupons of selected hybrid transactions 12%
January 2011
October / November 2011
(Aaa/AAA)
(Aaa/AAA)
USD 2bn 8.375%
USD 2bn 8.400%
11% 10% 9% 8% 7% 6%
(Baa1/A-)
(A2/A-)
5%
EUR 700m 7.750%
EUR 750m 7.375%
4% 3% 2% 1% 0% Jan-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Banks
Corporates
Source: Commerzbank
Corporates & Markets | Corporate Finance | Munich | November 2011
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Will Corporates "Follow" Banks? Average Coupons since 2010 10%
Corporates not immune from macro risks but impact on hybrid performance probably less than for banks
9% 8% 7%
Key questions
6%
Application of new Basel III guidelines to corporates?
5% 4%
- What are the new bank requirements?
3%
- Are they suitable to corporates?
2% 1%
Past instrument performance
0% Banks
Corporates
- Deferral - Non-calls
Corporates & Markets | Corporate Finance | Munich | November 2011
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Comparison: Typical Corporate Hybrid - Basel III Bank Capital
Corporates
Banks (Basel III)
Maturity
Long-dated / perpetual
Perpetual
Callable
Yes
Yes
Moderate
None
Yes
Yes
Deferral
Cumulative
Non-cumulative
Mandatory non-payment
Typically not
Yes
Yes
No
Preferred
Preferred
No
Yes
Incentive to redeem Discretionary coupons
Coupon pusher / dividend stopper Ranking Principal write-down / conversion
Corporates & Markets | Corporate Finance | Munich | November 2011
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Should a Corporate Hybrid Behave Different from Bank Hybrids?
Purpose of Capital When needed?
Corporates
Banks
Protection of senior creditors
Protection of depositors / senior creditors
Prevent insolvency
Prevent insolvency
Insufficient cash Over-indebtedness
Coupon deferral Ranking
Corporates & Markets | Corporate Finance | Munich | November 2011
Breach of minimum capital requirement Non-viability
Equity creation (write-down / conversion)
6
Issuer Insolvency as a Pricing Driver
Corporates
Banks
Insolvency
Insolvency (Corporate Law) Regulatory insolvency Non-viability
Losses
Assets
Equity + Liabilities
Corporates & Markets | Corporate Finance | Munich | November 2011
Assets
Equity + Liabilities
7
The Issue of Objective vs. Non-objective Triggers Objective Insolvency Triggers Corporate Law: Assets < Liabilities
CRD IV bank hybrids: Common Equity Tier 1 < 5.125%
Definition of Non-Viability (BIS) A decision that a write-off, without which the firm would become non-viable, is necessary, as determined by the relevant authority The decision to make a public sector injection of capital, or equivalent support, without which the firm would have become non-viable, as determined by the relevant authority
Swiss Contingent Capital: Common Equity Tier 1 < 5.0% (low strike) Common Equity Tier 1 < 7.0% (high strike)
Corporates & Markets | Corporate Finance | Munich | November 2011
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Recovery Value – Leverage is an Indicator Tangible Equity as Percentage of Tangible Assets High
Low
LEVERAGE
60% 50% 40% 30% 20% 10% 0% 45
Corporates
Significant higher leverage for banks than for corporates Thus, significant lower expected recovery values than for corporates Source: SNL, Bloomberg | Based on EuroSTOXX 50 corporates and EuroSTOXX Banks
Corporates & Markets | Corporate Finance | Munich | November 2011
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Individual Hybrid Performance
Corporates
Banks
Comment Corporates: financial distress
Coupon deferral
2
21
Banks: financial distress, nationalisation, EC restrictions No corporate hybrid with principal writedown
Principal write-down
n/a
8
So far, only limited number of bank hybrids with feature Going forward in all bank hybrids Corporate: financial distress
Non-Call
1
61
Banks: EC restrictions, cash preservation, economic decision Reserved investor responses to economic non-call decisions
Corporates & Markets | Corporate Finance | Munich | November 2011
10
Ratings Considerations Corporates Typical hybrid notching two notches below senior debt rating*
Banks Effectively two ratings - Stand-alone financial strength
- Investment grade issuers Senior debt rating reflects the stand-alone credit profile Methodology has not changed materially over the past years**
- Senior debt: reflects the implied expected government support for a bank Recent experience highlights that hybrid performance closer linked to stand-alone financial strength than senior rating Change of rating / notching methodology Substantial hybrid downgrades, various downgraded to non-investment grade Less investors able to hold security
* For investor-friendly C-basket / intermediate content structure ** Except for Moody‘s downgrade of some old D-basket transactions following revision of methodology in July 2010
Corporates & Markets | Corporate Finance | Munich | November 2011
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What are Fixed Income Investors Thinking About Hybrids? Corporate Hybrids Corporate hybrids are high beta products
Bank Hybrids Enhanced loss absorption feature problematic, particularly permanent write-down
For right credits still an attractive investor proposition
Regulatory discretion on bail-in feature difficult to price
- Stable cash flow generating corporates most favoured
High systematic correlation of banks could result in lower asset allocation to bank sector in general
Currently, market volatility bigger issue than structure
Non-calls for various Tier 1 and Lower Tier 2 instruments - Re-consideration of the “tail-risk”
Corporates & Markets | Corporate Finance | Munich | November 2011
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Implications Risks Market volatility Less attractive structural features Less likely short- / medium-term
Opportunities Increasing structural attractiveness of corporate hybrids vs. banks - Less non-loss absorbing bank hybrids going forward
Performance of corporate hybrids Deferral
Asset re-allocation away from banking sector could increase technical demand for corporate hybrids
Upcoming calls:
Inclusion of “investor-friendly” features
- 2012: 3 first call dates
- Fixed rate reset
- 2013: 7 first call dates
- Moderate step-up
- 2014 – 2016: 43 first calls
Consistent dividend and refinancing policy
Corporates & Markets | Corporate Finance | Munich | November 2011
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Max Jacob Head of DCM Bond Solutions
Mainzer Landstrasse 151-153 DLZ-Geb. 1 60327 Frankfurt am Main Phone +49 69 136 - 83360
[email protected]
Corporates & Markets | Corporate Finance | Munich | November 2011
Disclaimer This document has been created and published by Commerzbank AG, Frankfurt/Main or the group companies mentioned in the document ("Commerzbank"). The document is intended for distribution to the bank's professional and institutional clients and not to its private clients. Commerzbank Corporates & Markets (CBCM) is the investment banking division of Commerzbank AG, integrating debt, equities, interest rates and foreign exchange, with specific expertise in corporate risk and capital structuring. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Commerzbank Group with regard to the accuracy or completeness of the data. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. This report is for information purposes, it is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the securities mentioned in this report. Commerzbank Group may provide banking or other advisory services to interested parties. This report is intended solely for distribution to professional and business customers of Commerzbank Group. It is not intended to be distributed to private investors or private customers. Not for distribution to third parties. Commerzbank Group accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this report. © 2011 No part of this report may be reproduced or distributed in any manner without permission of Commerzbank Group. In particular Commerzbank Group does not allow the redistribution of this report to non-professional investors and cannot be held responsible in any way for any third parties who effect such redistribution.
Corporates & Markets | Corporate Finance | Munich | November 2011
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