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11-07-2012 12:45:00

Spain Bank Subordinated Bondholders Trying to Sell in Illiquid Market

Relateret indhold

-- Spanish banks' subordinated bonds under pressure after hints at forced losses

-- Price moves only moderate given ongoing concern over Spanish bank bailouts

-- Sellers struggle to find buyers in low trading volumes

By Serena Ruffoni and Art Patnaude

Investors left holding positions in Spanish subordinated bonds were trying to sell them Wednesday after the Spanish government hinted these type of instruments might be forced to take losses.

Late Tuesday it emerged that investors holding any equity or hybrid capital instruments issued by Spanish banks that might need a euro-zone bailout could see their investments completely wiped out.

Conservative-type bondholders--like banks, funds and Asian investors--were left trying to exit their positions in weaker Spanish banks, but with few investors interested in buying they were finding it hard to sell, bond traders said.

The bond prices didn't collapse on the news, with these bonds having been dumped by investors for some time, as the precedent set by Irish banks in 2010 made investors more aware of the risk associated with subordinated debt.

However, "unlike in Ireland, the move to force losses on junior bondholders is a significantly more contentious issue in Spain where retail customers make up a large proportion of the investor base," said Daiwa Capital Markets credit analyst Michael Symonds.

Bondholders at Spain's larger banks--Banco Santander S.A. (SAN.MC), Banco Bilbao Vizcaya Argentaria S.A. (BBVA.MC) and CaixaBank S.A. (CABK.MC)--won't likely be affected by the change as they aren't likely to take part in the bailout. But smaller banks will be impacted, with trading on their bonds over the last months evidence of these concerns.

"Expect subordinated peripheral debt to trade lower as there had been some expectations that it would be treated with compassion because of the retail bias," said Investec fixed-income analysts Elisabeth Afseth and Brian Barry in a note.

Bankia's subordinated bonds in particular has been singled out, as it was the first bank to ask the Spanish government for aid, traders said.

Other banks, like Banco Sabadell and Banco Popular, were in more of a grey area, as it remains uncertain whether they will be strong enough to avoid requesting state aid.

In the meantime, investors are playing safe, trying to dump these bonds when they can.

"The buyers left are hedge funds and sophisticated investors, which have a precise bet on what's going to happen...Otherwise there is very low buying appetite," one trader said.

For instance, Banco Sabadell's 6.25% subordinated bond maturing in April 2020 has seen its yield soar from around 7.2% around this time last year to 12.25% on June 29, according to data-provider Tradeweb.

However, trading on the bonds remains thin, according to traders, as the divergence between prices asked to hold these bonds diverges with expectations of the sellers. Those wanting to sell can't necessarily find a buyer.

Write to Serena Ruffoni at serena.ruffoni@dowjones.com and Art Patnaude at art.patnaude@dowjones.com

(END) Dow Jones Newswires

July 11, 2012 06:45 ET (10:45 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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