Euromoney heads to a leading banks pre-Christmas drinks party held in a London art gallery. A large and boisterous crowd hovers over trays of drinks and canapés in the entrance hall, ignoring the rooms beyond full of striking Renaissance paintings. The air is thick with gossip, surprisingly, about contingent convertibles. The buzz is that Barclays has been sounding out the markets for a deal, that UBS and Credit Suisse are preparing to issue. The host bank, too, is apparently keen to do one. Euromoney is confused. Markets are nervous about the economies of the developed world, about banks exposures to troubled sovereigns, about the unintended consequences of regulation. All eyes are on Ireland and the extent of possible losses to be handed to holders of its banks junior debt. Bank subordinated bonds are selling off.
Euromoney: "Why would senior debt investors buy something that builds in the inevitability of capital loss?"
Banker: "Thats why its a great time to do one. Theyre a high-yield product, in a low-yield world."
Euromoney: "Well whats the demand for it and what comparable would you price it off?"
Banker: "Obviously, the starting point is our own lower tier 2s."
Euromoney: "Oh, whats happening to those?"
Banker: "The yields have come down very sharply in the past few days."
Euromoney: "How come... have you been bidding them up yourselves?"
Banker: "Wouldnt you care to have a look at some of these wonderful paintings?"