Summary

  • CDS spreads have moved wider following bumpy equity markets
  • Santander did not call a LT2 bond – presumably unintentionally
  • RBS was not allowed to call its Tier 2 bonds by UK FSA

Headlines from the credit market this week

Following a sell-off in the stock market, CDS spreads have moved somewhat wider during the week. The investment grade CDS index, iTraxx Europe currently trades at 98bp whereas the high yield index, iTraxx Crossover, trades at 620bp. The cash market is holding up well following limited new supply and low secondary market activity.

For the second consecutive week, Banco Santander is mentioned in our weekly update. This time not in a positive context as confusion reigned when Santander did not call a LT2 bond. It seems that the issue was a mistake due to summer holidays in both Santander and Bank of Spain (the body that needs to give permission for the call). Subsequently, Santander has stated that it intends to call the bond at the next possible call date (3 months from now). Although a silly mistake or misunderstanding the non-call by such a big player caused some disruption in the subordinated bond market. On another note, the UK FSA has objected to RBS calling four subordinated debt instruments with call in October. The reason is the EU Commission’s communication of 19 August 2009 in which it states that banks subject to restructuring under state aid rules should not use state aid to remunerate their own capital. The Commission made it clear to the UK authorities that a decision by RBS to call these instruments would adversely affect the ongoing state aid discussions in relation to RBS (see also Weekly Credit Update – 21 August 2009).

All in all, these events cause renewed uncertainty about the (pricing of the) Tier 2 market. We still hold the view that the stronger banks will call their Tier 2 instruments as these bonds are of low importance to them compared to the Tier 1 ratio. German banks may be an exception as the amortization of the capital element does not take place until several years after first call date.