Mike Shedlock

The Financial Times notes a Big rise in subordinated debt issuance by EU banks

Banks have taken advantage of yield-chasing investors to issue $90.7bn of subordinated debt for the year to date, a 41 per cent increase compared to the same period in 2012. It is the highest such volume since the $122.4bn seen in 2008 according to Dealogic, the data provider.

The figures follow a deal agreed by European regulators earlier this month that will bring in so-called bail-in rules for senior bondholders from 2016, two years earlier than envisaged by finance ministers in their common position agreed in June.

Banks are also expected to issue record amounts of loss-absorbing contingent convertible – or “coco” – bonds next year, which can either convert to equity or wipe out investors entirely if a bank’s capital ratio falls below a pre-agreed level.

Junior Bonds

An apt description for "subordinated debt" is "junior bonds". From Wikipedia ...

  • Subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into liquidation or bankruptcy.
  • Subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, and ranks below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors.
  • Subordinated debt is issued periodically by most large banking corporations in the U.S. Subordinated debt can be expected to be especially risk-sensitive because subordinated debt holders have claims on bank assets only after senior debt holders. Subordinated debt holders also lack the upside gain enjoyed by shareholders.
  • Consider asset-backed securities. These are often issued in tranches. The senior tranches get paid back first; the subordinated tranches later. Mezzanine debt is another example of subordinated debt.
  • Subordinated bonds are regularly issued as part of the securitization of debt, such as in the issue of asset-backed securities, collateralized mortgage obligations or collateralized debt obligations.
  • Corporate issuers tend to prefer not to issue subordinated bonds because of the higher interest rate required to compensate for the higher risk, but may be forced to do so if indentures on earlier issues mandate their status as senior bonds.

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.