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Market is pricing in a “haircut” for Veneto and Vicenza senior bonds

by Nicola Borzi

The market is already pricing in a possible “haircut” (or reduction of the redemption value) for senior bonds issued by Veneto Banca and Banca Popolare di Vicenza, which are facing the risk of a so-called “bail-in,” where senior bondholders, investors and depositors must pay a share of a bank’s losses before it can be recapitalized by the state.

Over the past week, the price of Vicenza's senior bond with a 5% coupon maturing in October 2018 has lost nearly seven points to 78.84, with a gross annual yield soaring from 17.59% to 24.38%. The price of the senior bond issued by Veneto Banca maturing in May 2019 with a 4% coupon fell from 80.79 to 77.52, with the yield rising from 15.95% to 18.61%.

It goes without saying that the subordinated bonds issued by these banks have a price below 20 with yields in the 100% area. Subordinated bonds (or “junior” bonds) are securities with features that place them halfway between debt and equity and are subject to “bail-in.”

The two banks have almost 200 bonds in circulation (89 of the Veneto Banca group and 87 of the Vicenza group), including senior, subordinate and state-guaranteed.

Of these securities, three (one from Vicenza and two from Veneto Banca, with a total value of €3 and €3.5 billion respectively) are guaranteed by the state and issued in recent months to support liquidity.

But the other 193 bond issues are not guaranteed. Veneto Banca has 11 subordinated bonds in circulation for a value of €742.95 million. Vicenza, however, has six subordinated bonds in circulation for a counter value of just under €591 million.

In total, these are 17 issues worth €1.334 billion. These are on the “front line” the event of burden sharing or, worse, in an eventual “bail-in.”

There are then 176 other bonds issued by the two Veneto based banks. These are senior, ie non-subordinated, which, in the absence of private investors to invest in the two banks, according to Brussels's demands, the market fears may be subject to a haircut.

The 80 senior bonds in Vicenza are worth around €3.345 billion. Veneto Bank in circulation has 76 senior bond issues for €2.671 billion.