No pressure! UniCredit warns it could struggle to pay AT1 coupon if rights issue fails

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By:
Mark Baker
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As EGM approves capital increase, lender spells out impact on regulatory capital if things go wrong.

UniCredit on Thursday morning spelled out the potential impact of failing to complete either its €13 billion rights issue or various M&A transactions it announced late last year, warning that failure of either process could hurt the bank’s ability to pay coupons on its additional tier-1 (AT1) instruments.

“If the capital increase and/or the M&A transactions were not realised […] this could have temporarily negative impacts on the capacity of the UniCredit Group to comply with the constraints set by prudential regulations and/or identified by the Supervisory Authority and to pay out coupons on its additional tier-1 instruments,” the bank said.

The warning came ahead of an extraordinary general meeting due to be held on Thursday to approve the capital increase. The EGM subsequently approved the deal through a 99.6% vote in favour.

Jean-Pierre Mustier 160x186
Jean-Pierre Mustier,
CEO, UniCredit 

The bank also noted that even if its rights issue did complete as planned in the first quarter of the year – the formal deadline is the end of the first half – the bank’s capital ratios could still temporarily fall below the minimum distributable amount (MDA) and the Pillar 1 and Pillar 2 capital requirements for its tier-1 ratio, as defined by CRV IV.

UniCredit said this was due to the fact it would be recording hits to its CET1 ratio in its fourth-quarter 2016 accounts while the rights issue proceeds would not be received until during the first quarter.

In a statement, the bank said this temporary drop would be “due to short-term settlement timing difference which is expected to be remediated before the next AT1 coupon payment, due in March 2017”.

In a note published after the announcement, analysts at CreditSights noted that the bank was expected to wrap up its rights issue ahead of its next AT1 coupon payment, which is March 10 for its 6.75% euro-denominated bond, callable in September 2021.

The analysts also said that they did not expect UniCredit to experience the same kinds of issues that unsettled Deutsche Bank in early February 2016, when markets began to worry about the German bank's ability to meet its own AT1 coupon payments. "We do not expect UniCredit to have any Deutsche Bank-style problems with available distributable items as these amounted to €18.9 billion at FY15 and would only be partially depleted by forseeable FY16 losses," they wrote.

The threshold for MDA is a dynamic number rather than being tied to whatever the relevant calculation would have been at the most recent reporting date, meaning that as soon as UniCredit completes the capital increase, it would be free to make coupon payments. The CreditSights analysts said that the MDA cushion for UniCredit was 1.56% of risk-weighted assets at Q3 2016, taking into account the stress test methodology for this year but before any other actions.

The resulting €6.1 billion cushion would be likely to be wiped out by any net loss resulting from the €9.8 billion charges that the bank has said it will be taking in its fourth quarter results. Other moves beyond the rights issue that will boost capital, such as the sale of asset management firm Pioneer to Amundi and the sale of another stake in Bank Pekao, are unlikely to be formally completed before March.

The bond concerned traded off by as much as a point on Thursday morning following the announcement, to a yield-to-call of 8.75%, but was seen recovering some of those losses soon after.

"There's a bit of scare tactics here, but also they are trying to be fully transparent and make sure that all the information is out there," one bond investor told Euromoney. "The new CEO has had an active and very positive first six months and this is an important next stage."

Consob request

The bank was responding on Thursday to a request for further information from Consob, the Italian market regulator, following UniCredit’s announcement on December 13 of its new strategic plan to 2019.

UniCredit confirmed that the rights issue and the various other measures announced as part of CEO Jean-Pierre Mustier’s plan for the bank had not been specifically requested by supervisory authorities.

That plan was built around five pillars: strengthening capital, improving asset quality, transforming the operating model, maximizing the value of the commercial bank and adopting a leaner group corporate centre. The bank describes the rights issue as a “key pillar” of the plan.

The bank also confirmed there was no restriction to carrying out the rights issue during the first quarter of 2017 as planned. It said that on Tuesday the Bank of Italy had given its assent to the plan and that the European Central Bank (ECB) had confirmed that the resulting new shares would be classified as common equity tier 1.

In response to Consob’s third request – regarding the impact of failing to complete the planned transactions – the bank reiterated that its moves to improve asset quality would involve taking a new loan loss provision of €8.1 billion, which will be booked in the fourth quarter 2016 results.

The provisions are also related to the bank’s Project Fino transactions, which will see it offload a portfolio of €17.7 billion bad loans to Fortress and Pimco.

Also hitting the bank’s CET1 ratio in its Q4 2016 numbers are the redundancies the bank announced as part of the plan, which will see it cut an additional 6,500 jobs by 2019. The reductions involve a further cost of €1.7 billion.

The ECB’s Supervisory Review and Evaluation Process last year specified that UniCredit should have a transitional CET1 ratio of 8.75% by January 1, 2017. That transitional ratio is on the basis of a 2.5% Pillar 2 requirement, a 1.25% capital conservation buffer and a 0.5% G-SIB buffer.

In 2019, the capital conservation buffer would rise to its fully loaded level of 2.5% while the G-Sib buffer would reach 1%.

The bank said its fully loaded CET1 ratio as of September 30, 2016 stood at 10.8%, rising to 12.5% assuming completion of various disposals that it announced last year. The bank has said it plans to have a fully loaded CET1 ratio of above 12.5% in 2019.

UniCredit’s strategic plan is an attempt by Mustier – who joined as CEO in July – to put the bank on a sound financial footing and drag it away from being perceived as part of the Italian banking problem.

While not distancing himself from the firm’s domestic heritage, his presentation of his plans in December emphasized the pan-European nature of the firm and its deep reach into the real economy of countries such as Germany.

Market reaction to the plan has been positive. UniCredit shares opened on Thursday at €2.598, up 7% from the close on December 12, the day before Mustier announced the new strategic plan at an investor day in London. The bank’s market cap stands at about €17 billion, with the capital increase representing about 43% of enlarged capital.

No fewer than 19 banks are involved in the rights issue, in addition to UniCredit. Structuring advisers are Morgan Stanley and UBS, who will also be joint global coordinators and joint bookrunners alongside Bank of America Merrill Lynch, JPMorgan and Mediobanca. Additional co-global coordinators and joint bookrunners are Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs and HSBC.

A further group of joint bookrunners was announced in late December, comprising Banca IMI, Banco Santander, Barclays, BBVA, BNP Paribas, Commerzbank, Crédit Agricole, Natixis and Société Générale.