Banco Popular Espanol (BPE) was once the sixth largest bank in Spain. In recent years it has been struggling under a mountain of bad loans, the result of the Spanish housing boom’s bust. It has since raised capital from shareholders in attempts to shore up its balance sheet. The most recent share issue was held in May/June 2016 when it had a rights issue at €1.25 per share to raise €2.5 billion which was oversubscribed. However, it was not enough and now the bank’s struggles are over.
This week Spanish banking regulators forced the sale of the business to Banco Santander for €1. That’s not €1 per share, that’s €1 in total. The ECB had deemed this bank to be “failing or likely to fail” and it forced shareholders to sell to Banco Santander. So who lost out?
The shareholders and any other holders of what is referred to as common equity tier one (CET1) securities now own a company which no longer operates a business. Their holdings are essentially worthless. Additional tier one (AT1) securities have been cancelled, so AT1 holders get nothing. (In Australia, capital notes qualify as AT1 securities). Tier two (T2) bonds were converted to equity on orders of the regulator so these holders become shareholders and they too now hold worthless shares.
Not everyone lost. Banking regulations brought in after the GFC were designed to protect depositors so they were protected. Senior bond holders were also spared as these bonds are secured by the assets of BPE. In fact, the price of BPE bonds rose sharply after the sale. The point to be made here is when the issuer of your bonds goes belly up, unless you hold non-convertible bonds there is a chance you will receive nothing. T2 securities rank ahead of AT1 securities and AT1 securities rank ahead of CET1 holders but holders of all of these securities will receive nothing out of the BPE failure.
Campbell Dawson from Elstree Investment, a fund manager which specialises in Australian hybrid securities said BPE’s failure did not change the firm’s view on AT1 securities and other securities which may be converted into ordinary shares. “Given the inherent leverage there are real issues and the conversion mechanisms might not operate as people expect… In contrast Australian banks remain super viable. At some stage their viability might be lower than current levels and this should be reflected in prices at that time, but it’s beyond the time frame of the reset dates of the existing hybrid market. Australian bank hybrids are cheap enough here: bank equity may be not so.”
