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Liability management: Issuers bid for own sub bonds

Banks create core tier 1 capital via buyback operations.

UBS stirred talk of a welter of liability management transactions from financial institutions when it announced a tender offer for up to €1 billion of four lower tier 2 deals with a total notional value of SFr7 billion ($6.2 billion) between them in mid-March.

Various bankers thought the buyback was a smart move and said that there were a large number of other financial institutions looking closely at following suit with similar moves of their own.

Indeed two weeks after the UBS action, Banco Sabadell, Banca Populare di Milano, RBS and Lloyds all unveiled exchange and tender offers.

The mechanics of the UBS tender were relatively straightforward. UBS bid a minimum of 65 or 62.5, depending on the specific security, for the transaction.

UBS bid the fixed-rate subordinated bonds at 65, around a five-point premium on the offer side to where the notes were quoted in secondary markets. There is a big premium required to extricate securities from investors’ hands, especially floating-rate notes – for which the premium ranged from seven to 10 points.

The noises the regulators are making are that they do not believe that lower tier 2 is a particularly valuable part of banks’ capital structure.

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