Pimco, one of the world’s largest asset managers, has been caught out by the plunge in the price of Banco Popular’s riskiest bonds after it was left holding hundreds of millions of euros in exposure to the distressed Spanish bank.
Banco Popular has become the latest European bank to face questions about bonds issued at the lowest level of seniority, known as additional tier 1 bonds, after a collapse in prices for such debt issued by Deutsche Bank became the locus of fears for the European banking system in early 2016.
Prices for the two securities dropped sharply to record lows on Thursday, after reports that senior EU officials have warned the bank could be wound down if it fails to find a buyer. But the EU agency charged with overseeing bank failures issued a statement saying it “does not confirm” the report.
A perpetual bond with a face value of €500m is quoted at 55 cents on the euro, while the bank’s €750m AT1 is at an indicative price of 48 cents on the euro. Investors in AT1 bonds would be the first debtholders to be wiped out if Popular is wound down.
Pimco owned €279m of Popular’s outstanding €1.25bn of face value in AT1 bonds at the end of March, according to regulatory filings, making it by far the largest holder at the time.
The asset manager declined to comment.
AT1 bonds are issued by banks to meet regulatory requirements. The securities, which pay high coupons, are designed to absorb losses at times of distress, by converting to equity or being written down when the lender’s capital ratio falls below a certain point.
The pressure on bond prices come amid other signs of strain for Popular, which earlier this month disclosed a €137m loss for the first quarter, linked to higher provisions on its real estate portfolio. The bank’s shares have lost a third of their value so far this year.
So far, no AT1 bond has incurred losses for investors, either in terms of principal or coupon deferral, but Popular’s debt has now plumbed lower depths than Deutsche Bank whose paper registered a nadir of 70 cents last September.
“It would be the first triggering of an AT1,” said Lloyd Harris, an analyst at Old Mutual. “These types of events are more likely for Popular than they ever were for Deutsche Bank,” he added.
In mid-May, Popular said it had been approached by several rivals about a merger. The bank’s total capital ratio was 11.9 per cent as of the end of March, compared with 13.5 per cent a year earlier. It is “among the most poorly capitalised banks in Europe”, according to Andrew Lowe, an analyst at Berenberg.
Mr Lowe estimates the bank, which has a market capitalisation of €2.6bn and raised €2.5bn from shareholders in a rights issue last year, needs to raise €3bn-€5bn in additional capital, on top of asset sales.
“If you were to raise €3bn, the market may still question the capital situation,” he said, adding that even in that case, the share count would more than quadruple, creating “huge dilution” for shareholders.
Distress on Popular bonds has not spread to other highly subordinated Spanish bank bonds: a €1.5bn Santander AT1 bond, for example, is trading above 100 cents on the euro.
“It’s all a question of confidence now, to my mind,” said Mr Harris. “We know what the problem is — it’s just whether they can find a solution. I don’t think the regulator can currently say this bank is at the point of non-viability.”