Standard Chartered Decision Not to Redeem Bonds Roils Market

(Bloomberg) -- Standard Chartered Plc roiled credit markets in Europe on Tuesday, when the U.K. bank broke with convention by saying it wouldn't buy back its junior bonds at the first opportunity.

Standard Chartered's $750 million of 6.409 percent callable notes plunged by a record 14 cents on the dollar to 83 cents, the lowest since 2012, according to data compiled by Bloomberg. Royal Bank of Scotland Group Plc's $1 billion of 7.64 percent bonds dropped as much as five cents to 92 cents, the biggest decline in six years, and Credit Agricole SA's comparable securities slumped the most since 2012.

“Consistent with its focus on improving financial returns, the group does not plan to exercise its option in January 2017 to redeem,” the bank said in its earnings statement. The bank would have to pay more interest to refinance the debt, it said.

The move echoes Deutsche Bank AG's decision during the financial crisis not to redeem its bonds, which shook investor assumptions about callable subordinated debt and made it more difficult to value the securities. It highlights the dilemma faced by issuers of such debt: extend the bonds to take advantage of cheap funding at the risk of alienating investors, or redeem the bonds and refinance at a higher rate to satisfy investors.

Read Across

“Clearly the market was expecting a call here,” said Robert Montague, a senior financials analyst for ECM Asset Management in London, whose parent Wells Fargo Asset Management oversees about $480 billion, including some of Standard Chartered's other junior bonds. “People will start to look at similar bonds and question whether other banks will follow suit. Some will, some won't, but the uncertainty is unhelpful.”

Banks use the market for bonds with call dates rather than fixed maturities to meet regulatory reserve requirements for capital securities. The riskiest additional Tier 1 bonds can skip interest payments and be written off or converted into equity if a bank burns through financial reserves. The subordinated bonds rank after senior notes and loans for repayment.

“For people who were betting on a first call -- like me this time, I was wrong -- it's a reminder to be concentrated and focused and to double-check,” said Sven Pfeil, a money manager at Aramea Asset Management in Hamburg, who sold some of the bonds on Tuesday morning. “As an investor you now really have to check if it makes sense for an issuer to go for a call or not.”

Earnings Miss

Standard Chartered reported third-quarter profit on Tuesday that fell short of analyst estimates as revenue declined at all four of its divisions and executives said the economic environment remains challenging. Chief Executive Officer Bill Winters is looking to show he's stemmed the bank's losses after a sharp drop in revenue and surging loan impairments last year drove the Asia-focused lender to its first annual loss since 1989.

Deutsche Bank became the first major European lender to court investor hostility by failing to redeem subordinated bonds in December 2008. The German bank instead let the notes switch to a floating rate of interest after the cost of selling new debt soared during the global recession. While other banks have skipped calls since, it remains rare.

“There is read across to the market,” said Steve Hussey, a London-based analyst at AllianceBernstein, which manages about $490 billion, including some of the notes. “It should make people more aware of extension risk, including on the AT1s when their call dates start coming up. The market is starting to reprice those.”

--With assistance from Stephen Morris

To contact the reporter on this story: Tom Beardsworth in London at tbeardsworth@bloomberg.net.

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net, Abigail Moses