Optimism over Brazil hybrid rule change
A feature that makes it tougher for Brazilian banks to sell Basel III-compliant hybrids might be changed, say market sources
central bank is considering changing a regulation that has held
back banks' sales of hybrid tier one instruments, sources say.
Brazil's version of Basel III rules, the global framework that
governs bank capital, does not allow hybrids to offer a coupon
the country's largest banks are lobbying the regulator to
change the rules — and they could have success, said
Enrico Bentivegna, partner at Pinheiro Neto. "Based on our
experience with the Central Bank, I wouldn’t say
it’s very likely, but it is likely, that the
Central Bank would change [the rule] if it’s shown
that it would be detrimental to their own banks in
resets, common in European bank capital instruments, mean a
security's interest rate is changed at the first call date to
reflect movements in the underlying benchmark.
features give investors some comfort over an instrument's
long-term yield if it is not called at the first
no doubt Brazilian banks are disadvantaged by not having this
tool available to them at the moment compared to their peers,"
said Robert Whichello, global head of syndicate at BNP Paribas.
"It’s possible that they could have market access
without the reset. But that access is going to be less often,
and will probably come with a cost."
Brasil is the country’s only lender to sell a
new-style hybrid tier one instrument. Most
recently, it sold a 6.25% $2bn perpetual non-call 11-year
instrument in January last year. That deal came before
Brazil’s regulator had finalized its
implementation of Basel-III, and was structured in such a way
that the borrower could alter the terms of the security to
comply with the final rules.
regulator has prohibited coupon resets on the grounds that they
make hybrid securities less equity-like. "It’s
important to realize that regulators are looking at these
hybrids not only from the holders’ perspective
— more importantly, they’re looking at
them as a banking regulator," Alejandro Garcia, LatAm FIG
analyst at Fitch Ratings said.
securities are supposed to be loss-absorbing. From the
perspective of the robustness of a banking industry,
there’s an argument for a fixed-rate because
ultimately, it’s important these securities are
there’s a reset that happens when the bank is
going through some stress that could put more pressure on the
bank," said García.
Latin banks have strong capital ratios and have made
limited use of hybrid capital in the past.
spoke at LatinFinance's 12th Brazil Issuer & Investors'
Forum in Sao Paulo on Wednesday. LF