Bank capital: Premium for protection

Various losses, problems with SIVs and a contracting ABCP market have forced assets back onto balance sheets and stretched many banks’ capital ratios. But with investors still wary, banks are paying huge premiums for the precious capital.

UBS priced a €600 million perpetual non-call 10-year issue just days after announcing a $10 billion, sub-prime related write-down. Investors placed over €3 billion of orders with the Swiss bank. But UBS was forced to pay a massive 245 basis points over mid-swaps, more than three times what it would have paid for a comparable deal before the summer.

Société Générale priced a similar deal at 235bp, also oversubscribed. SocGen is rated (Aa1/AA/AA) slightly lower than UBS (Aaa/AA/AA), but paid 10bp less because of its having far less exposure to sub-prime debt, and so making it a safer option in investors’ eyes.

These deals were made possible by the relative stability of late December, and injected much-needed confidence into the market. But funding will remain cripplingly expensive for many financial institutions throughout 2008, and only prime names will find the essential capital readily available.