BlueBay Asset Management passed up the recent €500 million ($538 million) subordinated bond issuance by Portuguese Bank Caixa Geral de Depósitos due to “exposure” concerns and has cautioned investors against strategies buying “second or third tier banks.”
It comes amid persisting global concerns over the ability of some European banks to maintain coupon payments on contingent convertible bonds — also known as ‘CoCos’ — in a capital-testing event.
Last month, the Organization for Economic Cooperation and Development (OECD) warned in an economic survey that the Portuguese banking system was “highly vulnerable to external shocks.”
Despite this, state-owned Caixa Geral de Depósitos last week attracted more than €2 billion of orders for its “no-grow perpetual non-call five-year” bond, an additional tier 1 (AT1) security. It was the first time in a year that a Portuguese bank borrowed on the global debt market.
But BlueBay — the RBC-owned European fund management group, which manages some $56 billion in assets — said the attractive 10.75 per cent coupon on the recent issuance was insufficient to offset concerns.
“We didn’t buy it because, while the coupon looks attractive, you are vulnerable to outside losses in the future,” says Marc Stacey, portfolio manager of BlueBay’s Financial Capital Bond Fund, in an interview. “Banks are still highly levered institutions. If you choose the wrong name, there is never going to be enough debt to absorb much of that loss.”
Stacey adds that it’s important to pick the right bank and issuer, “because you are going to see haircuts across the capital structure.”
For Portuguese banks, the OECD report warned that any downgrade in the country’s credit rating could have a detrimental impact on their ability to obtain funding from the European Central Bank in future.
As it stands, Portugal is eligible for the ECB’s bond buying program because the country is rated as investment grade by Canadian agency DBRS, despite being rated as sub-investment grade by major agencies including Standard & Poor’s, Moody’s and Fitch.
Stacey notes the order in which European banks have come to market to issue debt and warns that some investors should give greater consideration to reasons behind valuations and coupons.
“It is important to choose the right bank. You have seen the best-in-class banks come to market first because they are the ones in the best position [to do so],” he explains. “My main stress would be that managers need to be cognizant of the fact that they can only buy the best-in-class names. If you are having to venture in second- or third-tier because you are running too much money, that would be when the alarm bells sound.”
Last week, the Financial Times reported that global fund giants BlackRock and Pimco also boycotted the issuance due to ongoing legal proceedings over investments with another Portugese lender. BlackRock and Pimco declined to comment on the story.