-- Market rally fades, but senior bank debt stays positive
-- Spanish bank recapitalization good news for bank
investors
-- Covered, senior bonds to benefit, subordinated debt at risk
given Irish precedent
By Serena Ruffoni
Investors in bank debt took heart Monday from the euro area's
pledge to provide 100 billion euro ($125 billion) for shoring up
Spain's sickly banks, with both Spanish and Italian bank bonds
enjoying a rally.
Cash spreads tightened 10 to 15 basis points even after interest
subsided, getting a region-wide boost from well-bid French and
German banks.
"All Spanish bank debt is benefiting from the additional capital
buffer," said Societe Generale bank analyst Jean-Luc Lepreux.
"Investors get more comfort in the capacity of Spanish banks to
absorb losses from the real estate sector."
ING credit strategists said the capital injection, to be
channelled through Spain's bank restructuring fund FROB, is a clear
positive and would benefit secure, collateralized debt like covered
bonds, which have a claim on bank assets, often real estate
loans.
"The funds made available for recapitalization will hopefully
result in the necessary write-downs and market-conform revaluation
of Spanish property loans," wrote Maureen Schuller at ING. She said
it would increase the quality of Spanish collateral, in turn
helping covered bonds.
Senior debt also rallied on the news, as it stands to gain from
the additional loss cushion potentially available.
On the other end of the spectrum, the fate of subordinated
Spanish bondholders remains uncertain, if Ireland serves as any
guide.
That country's bailout prompted debt exchanges for the four main
Irish lenders--Anglo Irish Bank, Allied Irish Bank, Bank of Ireland
and Irish Life and Permanent--leading to deep losses for
subordinated bondholders.
RBS strategists Alberto Gallo and Phoenix Kalen say the seven
largest Spanish banks have nearly EUR59 billion of subordinated
bonds. Most of that debt lies with the two largest institutions,
BBVA and Santander, and they don't need FROB funds. But smaller
banks have these bonds too, including EUR7.5 billion for Bankia and
Banco Financiero Y De Ahorros.
There is a risk that subordinated bondholders may have to take a
loss. "We think investors should be underweight sub bank bonds as
long as banks lack capital," the RBS strategists said.
Still, subordinated bank debt rallied Monday, in tandem with the
more secure senior and covered debt. "Potentially, subordinated
holders could lose out," said Lepreux at Societe Generale. "But in
the meantime, the FROB injection puts an additional layer between
them and the losses."
Write to Serena Ruffoni at serena.ruffoni@dowjones.com