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
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
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 permanent….
there's a reset that happens when the bank is going through
some stress that could put more pressure on the bank," said
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