Banco Popular Creditors Get A Shareholder Airbag

| About: Banco Popular (BPESY)
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By Breakingviews

Banco Popular (OTCPK:BPESY) creditors have received a shareholder airbag. The Spanish bank's stock fell sharply on Feb. 3 after it took bigger than expected losses, yet it took steps to protect hybrid debtholders from losing their coupons. Bondholders have an edge over banks, and the owners of their equity.

It's no surprise the bank is anything but popular with shareholders. The group raised capital less than a year ago. Now, newly taken real estate provisions leave it with a common equity Tier 1 ratio of just over 8 percent if capital reforms are fully applied today. KBW analysts reckon it needs up to 4 billion euros to get capital and provisions to its targeted level, and its stock trades at less than half its tangible book value.

Still, investors who hold additional Tier 1 bonds, new-fangled debt designed to absorb losses on a going concern, will be cheerier. Friday's loss could have eroded the amount of retained profits from which coupons on hybrid debt are paid - so-called distributable items. They were just 3.4 billion euros in the third quarter, according to Creditsights. Rather than let the distributable items run down, Popular has now replenished that bucket from other reserves.

It's the second bit of good news this kind of debtholder has had recently. Deutsche Bank (NYSE:DB), another potential candidate for coupon deferral, also said it would have enough distributable items to pay coupons this year.

The news highlights the relative strength of hybrid debtholders. The rules governing coupon payments are complex, vary by country and rely on bank discretion. That creates uncertainty. So far, however, bondholders are benefitting. Banks worry that if they cut off coupons debt markets may panic. In any case, the money gained from deferring a coupon is small - Banco Popular would save just 120 million euros by cutting coupons, Creditsights reckons. That may change as experience forces banks to cut bondholder payments. For now, it may be an opportunity. Banco Popular's hybrid debt yields over 9 percent - more than twice its expected return on equity this year.