$1bn perpetual hybrid tier one, 2012
Overhauling capital and liquidity standards for lenders in
the wake of large-scale bank failures in European and the US
has been a complex process. By January 2012, new rules from the
global standard-setter, the Basel Committee on Banking
Supervision, were mostly clear on hybrid capital –
securities that are given equity-like treatment for regulatory
capital purposes, but carry the tax advantages of debt. But the
Brazilian regulator, the Banco Central do Brasil had not yet
ruled over its local application.
However, keen to press ahead, Banco do Brasil impressed bank
capital structurers globally when it sold a $1 billion hybrid
tier one with a unique structure: the instrument granted scope
to amend the terms once the final Basel rules were in place to
make it qualify as a tier one instrument. Tthe fact that the
bank worked around regulatory uncertainty with a globally
unprecedented structure, the extent of the changes it allowed
to the instrument, and the overwhelming investor interest earns
Banco do Brasil LatinFinance’s bank financing deal
of a quarter century.
Most daringly, it allowed for a clause to be introduced
– if final rules required it – that would
write the bond off altogether if the bank needed the capital.
Despite the risks, investors placed $6 billion of orders for
the deal, which lead managers Banco do Brasil, BNP Paribas,
Citigroup, HSBC and Standard Chartered priced to yield 9.25%.
"We perceived some commitment that implementation in Brazil
would be similar to the Basel guidelines," says Daniel Maria,
executive manager at the bank. "We took the guidelines and gave
comfort to investors saying the amendments would be to adapt it
to Basel III, and would be capped by some parameters."
Now Brazil’s rules have been finalized, the
bank is working to incorporate, among others, a clause for the
security to be completely written off if Banco do
Brasil’s common equity capital slips below 5.125%
of its risk weighted assets. It hopes to have that in place by
October 1, 2013, when Brazil’s Basel rules come
into force, allowing it to be treated as tier one capital.