Markets update - Credit - Subordinated debt - Love me tender?

"Junk bonds prove there's nothing magical in a Aaa bond rating."

Merton Miller

Debt tender offer:
"When a firm retires all or a portion of its debt securities by making an offer to its debtholders to repurchase a predetermined number of bonds at a specified price and during a set period of time. Firms may use a debt tender offer as a mechanism for capital restructuring or refinancing."

In our post "The European issue of circularity", we discussed recapitalization issues in general, and subordinated Tier 1 bond tender in particular.

As a reminder:
"We know that "access to capital is depending on growth outlooks", a cheaper way for a bank to beef up its Core Tier 1 capital is to buy back at a discount its Hybrid Subordinated perpetual bonds in the secondary market."
We know that in 2009 "the game was for weakly capitalised banks to quietly retire bonds at distressed levels to create/boost Core Tier 1 capital, which was precious as long as they could finance the purchase with term debt."

We also know from this previous post that French bank BPCE tendered their bonds "to further enhance the quality and efficiency of the Company's capital base".

We expected others to follow suit and given the difficulty for the weaker players in the peripheral space to access capital at a reasonable rate, as well as needing to boost their core Tier 1 capital base, it was of no surprise to see Portuguese bank Banco Espirito Santo following French bank BPCE in tendering some of its subordinated debt on the 18th of October, but this time around, we have a debt to equity swap. So, yes, another long post.

But before we go through the nitty-gritty details, it is time for a quick market overview - Source Bloomberg:

Tighter slightly in the morning as per above picture but wider by the end of the day given concerns related to the cancellation of the meeting of European Union Finance ministers on Wednesday.
Itraxx Financial Senior 5 year CDS index increased by 7.5 bps to around 242 bps.
Itraxx Financial Subordinated 5 year CDS index increased by 6 bps to 474 bps. Overall, this month, the market is tighter by 80 bps since the end of last month, as we have seen a slight improvement in the credit markets so far in October in relation to spreads movements.
Itraxx Crossover 5 year CDS index (High Yield) ended up 7 bps wider as well on the day at around 714 bps.

The liquidity picture - source Bloomberg:

Some improvements but ECB overnight deposits are climbing at a faster pace compared to last month.
Flight to quality mode, on a slight hold pattern as indicated by the relationship between Germany Sovereign 5 year CDS and 10 year German government bonds yield slightly above 2% - source Bloomberg:

We started the day at around 2.13% yield and ended up around 2.05% yield.

EFSF bond versus 10 year German and French government bonds, correlation is still there between French bonds and EFSF bonds - source Bloomberg:

Itraxx Financial Senior 5 year CDS index, Eurostoxx and German Bund 10 year bond yield above 2%, Volatility levels - Source Bloomberg:

So, where do we go from there? It all depends on Wednesday European outcome and the can kicking game.

We all know by now we have moved from convergence to divergence in relation to bonds yields - source Bloomberg:

ECB has been stepping in since the 8th of August to support Italian and Spanish bond yields as they are again moving closer to the dangerous 6% yield threshold.

But back to our Subordinated bond tender story for our Portuguese bank.
The need to raise capital will be acute for peripheral countries due to issue of circularity we previously discussed. Given we know by now that access to capital is only open to better quality issuers in the financial space, the current level of financial spreads for weaker issuers, make it impossible for them to access funding at reasonable rates. Survival of the fittest is still the name of the game with the liquidity support provided by the ECB for these weaker players.

Bloomberg - "Savings Wars From Italy to Portugal Drive Bank Costs Higher"
By Charles Penty and Sonia Sirletti:
"The five largest banks in Italy, Spain and Portugal combined have more than 200 billion euros in medium- and long-term debt maturing before 2013, according to data compiled by Bloomberg.
The last time a Portuguese bank tapped wholesale debt markets was in March 2010, while Banco Santander SA’s 1 billion-euro sale of bonds in June was the most recent by a Spanish lender. UniCredit SpA, Italy’s largest bank, paid a record spread for Italian covered bonds in August when it raised 1 billion euros from a sale of 10-year notes that yielded 215 basis points more than the benchmark mid-swap rate.
Banco Espirito said in August that it trimmed lending by 3.1 percent from a year earlier and boosted customer funds by 23 percent to bring its loan to-deposit ratio down to 155 percent from 198 percent a year earlier. A lower loan-to-deposit ratio is a sign the bank is less reliant on sources of funding such as bond sales to fund its business."

Anabela Reis in a Bloomberg article indicated the following:
"Portuguese banks are being squeezed by demands that they boost capital as the government’s effort to reduce the deficit deepens the recession.
Echoing the struggles of their Greek counterparts, Portuguese lenders are unable to tap the financial markets for funds and hobbled by debt-laden state companies. At the same time, international regulators are forcing them to raise capital as they’re dependent on the European Central Bank for funds."

So austerity measures in conjunction with loan book contractions will lead unfortunately to a credit crunch in peripheral countries, seriously putting in jeopardy their economic growth plan and deficit reduction plans.
We discussed our concerns back in August in the post "It's the liquidity stupid...and why it matters again...":
"Lack of funding means that bank will have no choice but to shrink their loan books. If it happens, you will have another credit crunch in weaker European economies, meaning a huge drag on their economic recovery and therefore major challenges for our already struggling politicians.

As a reminder, 50% of banks earnings for average commercial banks come from the loan book: no funding, no loan; no loan, no growth; and; no growth means no earnings."

In a Bloomberg article by Liam Vaughan and Aaron Kirchfeld on the 25th of October -"Italy, Spain May Bear Brunt of European Bank Capital Plan":

"Banks with large holdings of U.K., German and French bonds may avoid raising additional capital, while those with Greek, Irish, Italian, Portuguese and Spanish debt will have to raise the most, according to London-based analysts at JPMorgan Chase and Co. and MF Global Ltd."

Hence the issue of circularity weighting on banks' capital needs.

Liam Vaughan and Aaron Kirchfeld commented:

"In Portugal, Banco Espirito Santo SA, the country’s largest lender by market value, may require about 3.4 billion euros, and Banco Comercial Portugues about 3.9 billion euros, according to MF Global.
Spain’s two largest banks, Banco Santander SA and BBVA may require about 3.1 billion euros each, Banco Popular SA 2.8 billion euros, Banco de Sabadell SA 2 billion euros and Bankinter SA 914 million euros, according to JPMorgan."

We also learn from the same article an interesting point:
"Banks with large holdings of U.K., German and French bonds may avoid raising additional capital, while those with Greek, Irish, Italian, Portuguese and Spanish debt will have to raise the most, according to London-based analysts at JP Morgan and MF Global Ltd."

Reason behind, another interesting accounting trick according to the same article:

"Lenders may be able to mark up the value of bonds that are trading above face value, allowing them to mitigate the cost of writing down their southern European sovereign debt, the people said."

So we have the direct effect of circularity we discussed at play as indicated again by Bloomberg:
"That may benefit U.K. and German lenders such as Royal Bank of Scotland Group Plc and Deutsche Bank AG, whose biggest holdings of bonds are those issued by their own governments. It may also allow French banks to avoid further fundraisings."

And we know from our conversation "Long hope - Short faith", that:
"Banks have fought bitterly against increasing equity buffers which is the cheapest and easiest way to recapitalize banks.

Why? Because allowing high payouts to shareholders, namely bank employees in many cases, allows financial institutions to raise their leverage."

Liam Vaughan and Aaron Kirchfeld in their Bloomberg article indicated the following:
"Lenders including Deutsche Bank have opposed further capital injections because they risk diluting shareholders without addressing the underlying problem of a potential Greek default. BNP Paribas SA, France’s largest bank, is among financial firms that have said they can meet demands for increased capital without cash injections."

So what will happen now and how will these banks raise money to meet capital ratios before the June 2012 deadline?

They will contract their balance sheets, in effect impacting access to credit and triggering most likely another credit crunch and it is already happening.

Source Bloomberg, Anabela Reis - "Portuguese Banks Pinched With Recession Deepening: Euro Credit"

"Loans to companies dropped to 116.2 billion euros in August, the lowest since March, and loans to individuals declined to 140.8 billion euros, the lowest in a year, according to the Bank of Portugal."

So what's all about your Banco Espirito Santo tender Martin?
Well as Espirito Santo Chief Executive Officer Ricardo Salgado put it nicely:

"Its more interesting for banks to extend their shareholder base, by converting bonds into shares, than having the state as a shareholder."

On October 18 Banco Espirito Santo announced a capital increase in effect via its bond tender:
BESPL 6.625 Perp callable 2012 Exchange at 74 Upper Tier 2 XS0147275829 Amount: 423,561,000

BESPL 4.50 Perp callable 2015 Exchange at 66 Upper Tier 2 XS0207754754 Amount: 474,033,000

BESPL 5.58 Perp callable 2014 Exchange at 61 Tier 1 XS0171467854 Amount: 553,265,000

And my good credit friend to comment:
"First debt to equity swap for a Portuguese bank: Banco Espirito Santo … but I guess not the last one for European banks … as we have been saying for a while…
The total amount of debt to be exchange for equities is euro 1,450,859,000 ! Banco Espirito Santo total market cap is approximately euro 1,743 million…which means 83.5% dilution for the current shareholders!"

This is the recent price action on Banco Espirito Santo share price:

So, in our debt to equity swap, courtesy of the subordinated bond tender, not only the subordinated bond holder is taking a hit, but our shareholder as well. Love me tender?

Subordinated debt - Wikipedia:
"From the perspective of policy-makers and regulators, the potential benefit from having banks issue subordinated debt is that the markets and their information-generating capabilities are enrolled in the "supervision" of the financial condition of the banks. This hopefully creates both an early-warning system, like the so-called "canary in the mine," and also an incentive for bank management to act prudently, thus helping to offset the moral hazard that can otherwise exist, especially if banks have limited equity and deposits are insured. This role of subordinated debt has attracted increasing attention from policy analysts in recent years."

But if you think the credit crunch will only happen in the peripheral countries because of banks shrinking their balance sheets, think again:
According to my good quant friend at Macro Research house RCUBE (Risk - Return - Research), and from the latest “Association Française des Trésoriers d’Entreprise” (French Corporate Treasurers Association), the latest survey confirms the reality of a credit crunch in France, respondents now consider that the cash situation for French corporates is nearly as bad as in late 2008! - "Our readers know that we pay very close attention to bank lending standards, especially in Europe where banks represent around 70% of corporate financing."

Europe Banks Vow $1 Trillion Shrinkage as Recapitalization Looms - Bloomberg by Anne-Sylvaine Chassany and Liam Vaughan - October 19:

"European banks, assuring investors they can weather the sovereign debt crisis by selling assets and reducing lending, may not be able to raise money fast enough to prevent government-forced recapitalizations.
Banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($1.06 trillion) in the next two years to reduce short-term funding needs and comply with tougher regulatory capital requirements, according to data compiled by Bloomberg. Morgan Stanley predicts that amount could reach 2 trillion euros across Europe as banks curb lending and sell loans and entire businesses. A lack of buyers and the losses lenders face on loan sales are making those targets unrealistic."

On a final note I leave you with Bloomberg - Chart of the Day - Euro Area Debt Quality Worsens at Record Pace:

"The CHART OF THE DAY shows the average rating for the bloc, calculated by Bloomberg from the assessments of the three main evaluators, has worsened to 3.14, representing the third-best grade, from 2.12 in May 2010 when the European Financial Stability Facility was designed. The measure fell 0.23 point in the previous 15 months. The average is calculated by giving a numerical grade for each grading, where 1 is the highest, and adjusting it for each country’s share of the EFSF guarantee.
Seven of the 17 euro-sharing nations have had their ratings downgraded since the announcement of the facility, which maintains a top grade from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. As the contagion has spread to banks, prompting governments to work out recapitalization plans, further cuts, mainly for the top-rated countries, may reduce the strength of the fund."

"How few there are who have courage enough to own their faults, or resolution enough to mend them."
Benjamin Franklin

Stay tuned!

EFSF - If you are in trouble - double

"What investors should never forget about credit risk is that it is an event risk!"
Credit Crises: From Tainted Loans to a Global Economic Meltdown by Jochen Felsenheimer and Philip Gisdakis

For a change, it is going to be a shorter post than usual. In this post we will review the extension of the EFSF and the risk it entails.

I have already touched on the EFSF and its similarity with CPDO products which were the craze during the halcyon days of structured credit in the post - "Much ado about nothing": "in our levereraged EFSF play, the lower volatility in interest rates, the lower likelihood of default. But in a CPDO/Leveraged EFSF, there is a risk of failure of repayment of full principal at maturity."

I discussed this very subject with my good credit friend today, and here is what he had to say about the EFSF following our conversation:
"To summarize, European states only guarantee each bond issued by the EFSF in accordance to the percentage of their contribution. Each time a country needs the funding of the EFSF, that country cannot guarantee anymore the future bonds to be issued … so the remaining countries have to share the cost of guaranteeing the future bonds. Initially, Portugal was a guarantor for the bond issued to help Ireland. Once Portugal asked for help, the EFSF lent money and Portugal could not guarantee any new bonds issued by the fund, while still guaranteeing the one issued before to help Greece and Ireland. So each time a country suffer a rating downgrade, the pressure increase on the other contributors.
That explains the subordination of the EFSF bonds to the sovereign bonds of its contributors … and why leveraging the fund is not the right solution !
Here below is a chart where you can see the correlation of the EFSF bonds with the French 10 years OAT bonds … versus the German 10 years Bund. The correlation between the EFSF 10 years and the French OAT 10 years is 1.
As French spreads keep on widening, so does the EFSF spreads. This is frightening and explain why a France downgrade will jeopardize the whole scheme."

And to illustrate our conversation we came up with the nice illustration below:
In white… EFSF 10 years bond
In yellow … French 10 years OAT
In orange … German 10 years Bund

What's wrong with this picture? You probably know by now.

EFSF existing bonds:

EFSF 10 year bond versus German Bund

And my good credit friend to add:
"Main talks were about E.U. combining the EFSF and the ESM by mid 2012 to create 1 Fund with 940 billion euro (1.3 trillion US $) firepower.
Well, obviously there is a number of issues about such a conclusion….

The 500 billion Euro ‘permanent” bailout fund (ESM) was slated to replace the 440 billion "Temporary" European Financial Stability Facility (EFSF) fund. Well, the latest proposal that has the stock markets excited is to merge the two funds …. But there is a bias, it double counting the money."

Bloomberg:
“European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said.
Negotiations over pairing the two funds as of mid-2012 accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders.
Disclosure of the dual-use option helped reverse declines in U.S. stocks and the euro on speculation it could help break the deadlock among European leaders. Their wrangling led to the scheduling of a summit three days after an Oct. 23 gathering.
The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. It is slated to be replaced by the European Stability Mechanism, which will hold 500 billion euros, in mid-2013.
A consensus is emerging to start the permanent fund in mid-2012, the people said. During the transition between the two funds, euro-area governments originally agreed to cap overall lending at 500 billion euros, a figure deemed sufficient when Greece, Ireland and Portugal were the primary victims of the debt crisis.”

On this very subject my good credit friend commented:
"Now …. Have a look:
The total overall cap is 500 billion euros, of which 160 billion have already been committed or spend to help Greece. Therefore there is only 340 billion left! So how can you get 940 billion euros? This would raise the permanent fund above the agreed upon amount…. And the German Supreme Court has stated this cannot be done without a popular vote (referendum) !!! Also bear in mind that the German Supreme Court has ruled there should not be a permanent bailout fund at all…. Which add to the already constitutional issue.
I do not see a popular vote in Germany having a positive outcome!"

Please find here after the link to the ESM term sheet as of March 21st 2011:
http://www.vm.fi/vm/fi/04_julkaisut_ja_asiakirjat/03_muut_asiakirjat/20110322Laajen/ESM_Term_Sheet_21.3.2011.pdf

Page 10 of the term sheet :“As originally foreseen, the EFSF will remain in place after June 2013 so as to administer the outstanding bonds. It will remain operational until it has received full payment of the financing granted to the Member States and has repaid its liabilities under the financial instruments issued and any obligations to reimburse guarantors. Undisbursed and unfunded portions of existing loan facilities should be transferred to the ESM (e.g. payment and financing of installments that would become due only after the entry into force of ESM). The consolidated EFSF and ESM lending shall not exceed € 500 bn.”

So, please fasten your seat belt as the weeks ahead might be quite volatile indeed.

"When written in Chinese, the word "crisis" is composed of two characters. One represents danger and the other represents opportunity."
John F. Kennedy

Stay tuned!

Markets update - Credit - Bedtime story and the European issue of circularity

"Nothing is more frequently overlooked than the obvious."
Thomas Temple Hoyne

Volatility again today. We had a better tone in the morning in the European space credit wise, but we were back to flat at the end of the day. Following the G20, everyone expecting in a week's time big resolution coming out of the European summit. They should be bracing themselves for some disappointment.

As per Bloomberg article today by Tony Czuczka and Rainer Buergin:
"German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.” Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline."

In this post we will have a look again at bank recapitalization, given it is still the ongoing subject, as a follow up on our previous discussion. We will also discuss the issue of circularity. We touched on the subject in our post - "Macro and Markets update - It's the liquidity stupid...and why it matters again..." in relation to European banks liquidity issues:
"The circularity issue weighting on liquidity:
In highly-indebted Euro zone countries, the issue of circularity comes from the high correlation with their sovereign creditworthiness, meaning they are experiencing very high level of stress on their current funding."

So here we go for another long conversation.

But first, a credit overview.
The Itraxx Credit Indices picture today - Source Bloomberg:

While the tone had been much positive at the open, on credit indices with at one point Itraxx Crossover 5 year index (High Yield) tightening by 23 bps, the market closed the day roughly unchanged, as equities moved from the positive territory to negative. German Finance Minister Wolfgang Schaeuble comments weighted heavily on the market by the end of European close.

Enel, Italy's largest power company came to the market with 2014 and 2015, with a new issue premium to secondary of around 50 bps for the 2014 bonds and a new issue premium of 90 bps for the longer tranche.

There was as well some resurgence in news issues in the financial space with an interesting 2 year Senior Unsecured Floating Rate note from Commerzbank, rated (A2/A/A+ outlook : stbl/neg/stbl), which priced at Euribor +158 bps. On the 12th of October SEB (Skandinaviska Enskilda Banken AB - A1 / A / A+) priced a similar note at around Euribor +120 bps.
We know from the post "Markets update - Credit - Misery loves company" that ABN Amro (Aa3 /A/A+ all stable outlook), priced a similar floater on the 30th of September at around Euribor +130 bps, as a follow up on Deutsche bank which priced at around +100 bps.

So no surprise there, new issues are not only repricing the secondary issues, but coming with big concessions given the need for banks to raise capital. It is interesting to note that apart from these 2 year Senior unsecured notes, for some prime issuers, it seems the subordinated market is still completely shut down.

In relation to flight to quality, convergence of German 10 year Government Yield and German Sovereign CDS seems to have stopped in its tracks - Source Bloomberg:

From 2.18% Yield to 2.08% on the 10 Year German Bund.

But the interesting part today was the new record set in terms of spread between the German 10 year Bond and the French 10 year Bond (OAT), which reached 95 bps - Source Bloomberg:

France still in the crosshairs of the European bond vigilantes.

The liquidity picture - Source Bloomberg:

Some improvement but nothing major so far.

And Nomura had a good comment relating to recent market action in their recent Rates Strategy Europe weekly from the 14th of October:
"Convalescence with relapse risk:
Beyond October, we are worried by the possibility of a relapse in market sentiment. There is ample scope for disappointment on the euro plan (see Euro plan: Bazooka or damp squib?). Our take is that the "bazooka" will not happen. But in a risk-on phase partly triggered by better economic sentiment, it would take a really disappointing announcement to immediately derail markets. In July, there was a very incomplete announcement in a very negative market; the background is different this time. So at this stage, we are not necessarily waiting for a major risk off, but we are aware of the risk of relapse in the aftermath. There are several triggers: (1) the PSI will be revisited with tougher terms, paving the way for a possible CDS trigger, (2) the political situation in Greece is very unstable and the Troika returns to Athens no later than end-November (assuming the next tranche is paid, the government has money only until January), and (3) it is not clear how the ECB's bond buying will continue and how the central bank will react to a GGB default (the collateral issue can be by-passed in the event of a temporary selective default; it would be more complicated with a CDS-triggering event)."
Ouch...so much for all the recent European politicians "Bedtime story"...

And Nomura to add relating to the periphery:
"The market has largely shaken off the recent euphoria over possible quick fixes to the Eurozone and sovereign spreads have come under pressure to some extent as a consequence. While many would look for a large scale solution on the horizon, from the possibility of extra IMF funds (possible with many caveats), to large scale recap of banks (obviously not a solution in and of itself), to various insurance schemes (which could come with practical and legal challenges), the likelihood of any single solution arriving imminently appears remote.

Against this backdrop we continue to believe that sovereign spreads that are unsupported by the ECB will come under pressure."

So, unfortunately, no Bazooka to be expected anytime soon.

And that leads us to the issue of circularity we previously mentioned. And, in relation to bank recapitalization, don't expect wizards, fairy tales and magic tricks in our "Bedtime story".
The issue of circularity we mentioned earlier again cannot be clearer than the graph realised by Martin Sibileau in his latest post - "The EU must not recapitalize banks":

And as indicated by Martin Sibileau:
"The circular reasoning therefore resides in that the recapitalization of banks by their sovereigns increases the sovereign deficits, lowering the value of their liabilities, generating further losses to the same banks, which would again need more capital."

To illustrate further the issue of circularity, here is a table from Bloomberg displaying Greek debt ownership:

The 6 top owners of Greek debt are 6 Greek banks.

And I have to agree with Martin Sibileau's view:
"What would be a solution for the EU? We have repeatedly said it: Either full fiscal union or monetization of the sovereign debts. Anything in between is an intellectual exercise of dubious utility."

And the clear difference between the ECB and the FED in relation to bond purchases is as follows, as pointed out by Martin Sibileau:
“…The Fed was financing what we call in Economics a “stock”, i.e.( mortgages) “…a variable that is measured at one specific time, and represents a quantity existing at that point in time, which may have accumulated in the past…”
"The ECB is financing “flows”, deficits, or “…a variable that is measured over an interval of time…” Therefore, by definition, we cannot know that variable until the interval of time ends…When will deficits end? Exactly!! Nobody knows! Thus, it is naïve to ask more clarity on this issue from the ECB. The only thing that is clear here is that the Euro, i.e. the liabilities of the ECB will necessarily have to depreciate as long as that interval of time exists, until a clear reduction in the deficits is seen…”
Stock and flows:
"Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense."

And following the circularity, let's discuss current recapitalization issues as there were some interesting developments today namely involving subordinated Tier 1 debt.

BPCE, the French bank decided to launch a tender and offered to buy back subordinated bonds as much as 1.8 billion Euros of four subordinated hybrid securities:

Why so? Given we know that "access to capital is depending on growth outlooks", a cheaper way for a bank to beef up its Core Tier 1 capital is to buy back at a discount its Hybrid Subordinated perpetual bonds in the secondary market.

We discussed this very subject in the post "Markets update - Credit - Crash Test for Dummies":
"In 2009, the game was for weakly capitalised banks to quietly retire bonds at distressed levels to create/boost Core Tier 1 capital, which was precious as long as they could finance the purchase with term debt.

If a financial entity is able to buy back its LT2 debt below par, it generates earnings (the beauty of FAS 159, on that subject see my post "Statement 159 - Debt Valuation Adjustments - Déjà Vu 2008.") and then Core Tier 1 capital. It's a kind of magic...because this way a bank's total capital base goes down (by retiring LT2 debt) and given regulators care most about the Core Tier 1 ratio, everyone is happy (probably note the subordinate bondholder)."

and bingo! French bank BPCE strikes today!

And a market maker to comment following the BPCE tender:
"Very big moves in T1 space mainly driven by BPCE T1 tender which came approximately 13 points above secondary (for the low coupons bonds). The market rapidly drew the conclusion that similar moves would be coming on in French names - with a particular focus on low-cash, step-up bonds."

BPCE Tier 1 subordinated perpetual bonds indicative round up:
BPCEGP 4.625% 07/15 (call date) cash price - 61/64 +13.75 points
BPCEGP 5.25% 07/14 (call date) cash price - 62/65 +11 points
BPCEGP 6.117% 10/17 (call date) cash price 61/64 +9 points
BPCEGP 9% 03/15 (call date) cash price 78/80 +4 points
BPCE 9.25% 04/15 (call date) cash price 76/79 -

BPCEGP 5.25% 07/14 (call date) - Source Bloomberg

BPCE commented on its tender:
"The Tender Offer is being undertaken in order to further enhance the quality and efficiency of the Company's capital base."
Of course it is!

On a side note, FAS 159 is fashionable again in the banking space:
DVA/CVA in earnings:
UBS = 1.6 billion USD
JP Morgan = 1.9 billion USD
Citi = 1.9 billion USD
To be continued...(Bank of America, Goldman Sachs, Morgan Stanley, etc.).

And on a final note I leave you with Bloomberg chart of the day, showing that Asian stocks are yet to reach bear-market floors:

According to Bloomberg:
"Stocks in Asia excluding Japan may extend a bear-market rally for “several” weeks before resuming declines that could send them to new lows next year, according to Mizuho Securities Asia Ltd. The MSCI All Country Asia excluding Japan Index rebounded 13 percent in the six days through Oct. 13, following a 31 percent plunge from its April 28 intraday high. In the four previous periods when the Asian gauge dropped more than 30 percent from peak to trough closing levels since records began in 1988, all were interrupted by rallies of between 14 and 45 percent, before the routs resumed. A minimum drop of 20 percent from a peak signals to some investors a bear market."

"There cannot be a crisis next week. My schedule is already full."
Henry A. Kissinger

Stay tuned!