Preference Shares & Subordinated Bonds COVID Bail-In Risks
Posted: April 24th, 2020, 3:57 pm
I own a fair selection of bank preference shares and subordinated bonds, mostly dating back to not long after the 2008 crash (circa 2009-2013). Stuff like LLPC, BOI, NWBD, Co-Op (42TE etc), SAN, STAC, HALP etc. These are split across my ISA and SIPP. I recall there was a fair bit of turbulence with these at different times but for the most part, very few were actually bailed in and the yields have mainly fallen until this year.
When the COVID crisis looked like it was coming our way in late Feb/early March, I sold most of them off in my ISA but kept the ones in my SIPP (the ratio of holdings is about 50/50). This was on the basis that I thought the prices would fall and I wasn't sure about whether the coupons and dividends would continue. I didn't know this for definite, hence why I only sold half so if I was wrong, I would still have some skin in the game (and continue to receive some income). The prices when I sold were still relatively close to the highs and my reasoning was that the worst case would be buying them back for not a great deal more than what I sold them for (currently they're roughly 10-20% cheaper).
My rationale for selling is that while the banks aren't as badly affected by COVID, they lend money to many of the companies who are. In a sense the situation is the inverse of 2008 where the credit crunch eventually filtered through to the wider economy, this is businesses being unable to pay their bills which will eventually filter back to the banks. Either way, the outcome is defaults and that may lead to banks not being able to honour their own obligations as a consequence.
My question is what is the situation with subordinated debt now if a bank gets into trouble? I know there are different clauses for each instrument (e.g. cumulative dividends for some, 4 for 3 in the case of NWBD etc) but I seem to recall the rules had been changed so bond holders could be bailed in more easily than during the banking crisis. So what is the true bail-in risk for subordinated bank debt and has the market underestimated it?
When the COVID crisis looked like it was coming our way in late Feb/early March, I sold most of them off in my ISA but kept the ones in my SIPP (the ratio of holdings is about 50/50). This was on the basis that I thought the prices would fall and I wasn't sure about whether the coupons and dividends would continue. I didn't know this for definite, hence why I only sold half so if I was wrong, I would still have some skin in the game (and continue to receive some income). The prices when I sold were still relatively close to the highs and my reasoning was that the worst case would be buying them back for not a great deal more than what I sold them for (currently they're roughly 10-20% cheaper).
My rationale for selling is that while the banks aren't as badly affected by COVID, they lend money to many of the companies who are. In a sense the situation is the inverse of 2008 where the credit crunch eventually filtered through to the wider economy, this is businesses being unable to pay their bills which will eventually filter back to the banks. Either way, the outcome is defaults and that may lead to banks not being able to honour their own obligations as a consequence.
My question is what is the situation with subordinated debt now if a bank gets into trouble? I know there are different clauses for each instrument (e.g. cumulative dividends for some, 4 for 3 in the case of NWBD etc) but I seem to recall the rules had been changed so bond holders could be bailed in more easily than during the banking crisis. So what is the true bail-in risk for subordinated bank debt and has the market underestimated it?