The Future of Bank Funding and Capital: Solutions for issuers, opportunities for investors
Table of Contents
INTRODUCTION
- Black swan in a perfect storm
- A sea-change to the system
- The framework for financial stability – the three-pronged approach to reconstruction
- Shock and awe
- Hybrid securities and The Four Horsemen of the Credit Apocalypse
- Investor demand will likely drive new business models
- Investor preferences shaping business strategy to attract investment capital
- Economic recovery and stimulus
- Recent market developments
- The future of funding in capital markets
- Investors set the agenda
- A nuclear winter next?
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SECTION 01 CRISIS, STABILISATION, RECONSTRUCTION
Chapter 01 The framework for financial stability – the three-pronged approach
- The financial stability framework
- The ‘three-pronged’ approach
- Short-term liquidity
- Term funding
- Provision of capital
- Who should consider using one (or all) of the three prongs?
- Conclusion
Chapter 02 The provision of funding
- The provision of short-term liquidity
- Approach to the provision of short-term liquidity
- The UK approach
- The US approach
- The Spanish approach
- The provision of term funding
- Approach to the provision of term funding
- Focus: The French example (indirect issuance)
- Assessing the quality of a guarantee
- Industry comment
- Impact on investors
- Impact of guarantees on issuance volumes
- The provision of capital
- Focus: The French example (bank recapitalisation)
- Structure of the plan
- Impact on issuers
- Impact on investors
- Hybrid securities and the preferred stock paradigm
- How sustainable are dividend payments?
- The preferred stock paradigm
- Investor perceptions on hybrid securities
- Investor risk factors for hybrid securities
- Some key investor risks highlighted in failed banks
- Investor payment deferral risk (conditions and consequences)
- Investor extension risk
- Bank capital background
- The Basel Capital Accord
- General characteristics of bank capital (based on BIS guidelines)
- Tier 1 hybrid instruments
- Tier 2 hybrid instruments
- Tier 3 capital
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Chapter 03 Investor overview
- Introduction
- Crisis drives evolution in investor prominence and preference
- Institutional investors
- Retail private bank market
- Key global investor trends
- Profile of select UK investors
- Profile of select German investors
- Profile of select French investors
- Profile of select US investors
- Conclusion: the investor perspective
Chapter 04 Market overview
- Debt market size, growth and structure
- The financial institutions sector supply
- Government guaranteed supply
- Industry comment
- Europe investor market
- US investor market
- Asia-Pacific market
- Senior unsecured supply
- Recent bank sector supply
- Industry comment
- Europe investor market
- US investor market
- Asia-Pacific market
- Recent insurance sector supply
- Industry comment
- Europe investor market
- US investor market
- Subordinated supply
- Recent bank sector supply
- Industry comment
- Europe investor market
- US investor market
- Asia-Pacific market
- The corporate sector
- Recent corporate sector supply
- Industry comment
- Europe investor market
- US investor market
- Asia-Pacific market
- SSA sector
- Industry comment
- Covered bond sector
- Calyon Roundtable: The future of the covered bond market
- Industry comment
- Conclusion
Chapter 05 Recent developments in the reconstruction
- Reconstruction toolkit
- Regulatory developments
- European Commission proposal to amend the Capital Requirements Directive
- Turner Report proposes new regulatory regime for UK financial services sector
- Industry comment
- The evolving definition of capital
- Industry comment
- Rethinking bank regulation and supervision
- European Commission regulation of bank leverage
- Reforms may result in increased bank capital issuance
- US rescue plan proposal
- Framework for regulation and supervision criticised
- Regulators change the terms of capital securities
- Industry comment
- Rating agency developments
- Rating agency approach to hybrid capital
- Notching methodology for the bank sector
- Industry comment
- Accounting developments
- Accounting guidelines for equity instruments under IFRS
- Accounting for equity under IFRS: recent FASB proposals
- Fair value accounting developments
- Industry comment
- Focus: Issuer developments
- Issuers decide not to call subordinated callable securities
- Industry comment
- Restructuring (buybacks, tenders and exchanges)
- Industry comment
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Appendix 01
Take Two: Treasury Announces the Financial Stability Plan
By Morrison & Foerster LLP
- Overview
- Financial Stability Trust
- Public-Private Investment Fund
- Consumer and Business Lending Initiative
- Transparency and Accountability Agenda
- Affordable Housing Support and Foreclosure Prevention Plan
- Small Business and Community Lending Initiative
- Conclusion
Appendix 02
Details on the New Federal Financial Stability Programs: CAP replaces CaPP, Stress Tests and amended TLGP
By Morrison & Foerster LLP
- Background
- Capital Assistance Program (CAP)
- Exchange of Capital Purchase Program preferred stock
- Eligible institutions
- Program specifics
- Mandatory convertible preferred
- Warrants
- Corporate Governance and Executive Compensation
- Economic assessments or ‘Stress Tests’
- TLGP’s Debt Guarantee Program for mandatory convertible debt
- Mandatory convertible debt – defined
- Issuance cap unchanged
- Approval required
- Disclosure and fees
- Comment period
- Other considerations
- Conclusion
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Appendix 03
Capital Alternatives for Financial Institutions: Treasury’s TARP Capital Purchase Program
By Morrison & Foerster LLP
- Troubled Assets Relief Program overview
- TARP Capital Purchase Program
- Terms of Treasury’s Investment
- Application process
- Considerations for participating financial institutions
- The CaPP and the TLGP
- Capital Purchase Program for private institutions
- Capital Purchase Program for subchapter S-corporations
- Recent events
Appendix 04
Term Asset-backed securities Loan Facility (TALF): Can Wall Street Help Main Street?
By Morrison & Foerster LLP
- Background
- TALF overview
- Eligibility
- Borrower eligibility
- ABS eligibility
- ABS underlying asset eligibility
- Sponsor eligibility
- Loan structure, fees and pricing
- Loan structure
- Loan pricing
- Conclusion
Appendix 05
Funding Transactions under the FDIC’s Temporary Guarantee Liquidity Program’s Debt Guarantee Program
By Morrison & Foerster LLP
- Background
- Eligibility and participation
- Definition of senior unsecured debt
- Guaranteed debt issuance cap
- Issuance of non-guaranteed debt
- Long-term non-guaranteed debt program for participating entities
- New non-guaranteed debt issuance option
- Extended DGP
- Eligible entities for extended DGP
- Extension of issuance period
- Extension of guarantee period
- Mandatory convertible debt
- Mandatory convertible debt – defined
- Issuance cap unchanged
- Approval required
- Disclosure and fees
- Guaranteed mandatory convertible debt considerations
- Payment of claims
- Guarantee coverage
- Master agreement
- Fees, assessments and surcharges
- Long-term non-guaranteed debt program
- Related regulatory action: SEC and OCC Securities and Exchange Commission exemption
- Office of the Comptroller of the Currency exemption
- Considerations
- Notice requirements
- Authorisation and supervision
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SECTION 02 OUTLOOK FOR THE FUTURE
Chapter 06 The path to recovery and economic rehabilitation
No plan, no gain
The Public-Private Partnership Investment Program (PPIP) – will it work?
By Nouriel Roubini, RGE Monitor
- Assessment
- Valuation of illiquid assets
- Will banks participate?
- Bottom line: Will it get credit flowing again?
- What has been done/proposed for the current crisis around the world
- Perspectives on the future
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Chapter 07 Calyon 2009 Client Forum, with Nouriel Roubini
Chapter 08 Part 1: What future for financials?
By Bill Blain, KNG Securities
- Introduction
- Blame the banks
- The global economic circulatory system
- Global cardiac arrest and the capital/liquidity crisis
- Capital heart attack – but its liquidity that kills
- Emergency treatment
- Recovery and rehabilitation
- Banks in the current economic environment (take these three pills together)
- The regulatory and reporting regimes
- Bank behaviours
- Investors
- Customers
- The prognosis
- Conclusion
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Chapter 8 Part 2: A financial institutions investment framework – alternative assets?
By Bill Blain, KNG Securities
- Bear rally or sustained turnaround?
- The FIG environment
- Tactical factors
- Strategic factors
- Problems remain
- FIG markets
- Rally in financial instruments
- Rally – but chronic illiquidity distorts markets
- Investment approaches
- Thematic approach
- By name: find the story
- By product and market – find the risk reward
- Capital – highest rewards, highest risks
- Conclusion
Chapter 09 Recovery rhymes with uncertainty
By Calyon Fixed Income Markets Research
- Overview: an unavoidable rise in default rates
- Replacing the hand of Adam Smith
- Central banks and the crisis
- Exchange rates: USD down but not out
- Focus: QE and the USD
- Interest rates: calm, then storm
- US Fed is fast becoming the last remaining buyer
- Can the ECB buy European Treasuries?
- ECB is likely to avoid large bond purchases
- Signs of improving market functionality are growing
- Libor markets: better bank results and even more cash flooding in
- Energy: OPEC the ‘big regulator’
- Metals: gold regains its glitter
- The US: progress on the painful path to recovery
- A forceful, multi-pronged response
- Housing
- Financial institutions
- Fiscal policy
- Return to growth
- Risk profile
- Focus: US fiscal stimulus
- Why?
- How?
- How much? (Take I)
- How much? (Take II)
- Japan: cyclical rather than structural
- Focus: Fiscal policy in Japan
- Eurozone: non-conventional recession - a broad-based collapse in activity
- Focus: The public deficit trend in the Eurozone in 2009
- France: testing the bottom
- Germany: industrial depression threat
- The UK: fighting deflation the priority
- Australia: shallow recession
- New Zealand: double whammy hits growth
- Canada: cannot escape US recession
- Emerging countries: a virtually universal recession
- Central & Eastern Europe: heavy going ahead
- To float or not to float?
- Russia: less economic growth, more RUB stability
- Turkey: 2009 budget under pressure
- Asia: growth outlook downgraded
- Middle East: sovereign wealth funds reassess their strategies
- South Africa: Current account deficit widening
- Brazil: losing confidence
- Mexico: too close to the US
Chapter 10 Calyon/Chevreux roundtable discussion, 24 February 2009
Chapter 11 Q&A interview – Investor outlook on the future of funding
Chapter 12 Conclusion
- The three-pronged approach to stability and reconstruction has averted disaster
- Investors in control
- The goalposts are being moved
- No quick recovery
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Appendix 01
Standard & Poor’s: Global banking roundtable: The next era looks less risky – and less profitable
Appendix 02
Standard & Poor’s: Economic research: How today’s turmoil will shape tomorrow’s markets – the US needs time to regroup
Appendix 03
Standard & Poor’s: How the credit-market crisis is changing the world of banking
Appendix 04
Standard & Poor’s: Where the credit markets and the global economy may be headed in 2009
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LIST OF TABLES AND FIGURES
Table I.1: Investment fundamentals, future and past
Table I.2: Some of the steps taken for banking stabilisation
Table I.3: Potential scenarios for banks to develop new business models
Table 1.1: Summary of government/political, investor and issuer objectives
Table 1.2: Benefits of the three-pronged approach
Table 1.3: Advantages/disadvantages of the three-pronged approach
Table 1.4: Global financial rescue plans
Table 2.1: Comparison of liquidity provisions by jurisdiction
Table 2.2: The UK approach
Table 2.3: The US approach
Table 2.4: The Spanish approach
Table 2.5: Illustrative cost to redeem US$1bn worth of capital issued today
Table 2.6: Dividend yield of select European banks (%)
Table 2.7: Impact of recent events on hybrid securities
Table 4.1: Covered bond new issues
Table 5.1: Rationale for restructuring debt securities
Table 5.2: Considerations for restructuring existing senior/subordinated securities
Table A1: Expected ABS haircuts
Table A2: New DGP surcharges
Table 6.1: Summary of some key global fiscal stimulus plans
Table 9.1: Exchange rate forecasts
Table 9.2: Interest rate forecasts – developed markets
Table 9.3: Interest rate forecasts – emerging markets
Table 9.4: Economic forecasts
Table 9.5: Commodities forecasts
Table 12.1: Some of the steps taken for banking stabilisation
Table 12.2: Investment fundamentals, future and past
Table 12.3: Funding option overview
Figure I.1: The three-pronged approach
Figure I.2: Areas of change
Figure 1.1: The three-pronged approach
Figure 2.1: Approach to short-term liquidity
Figure 2.2: Approach to term funding
Figure 2.3: Guaranteed indirect issue structure – the French example
Figure 2.4: Qualifying the quality of a guarantee
Figure 2.5: Expected government guaranteed issuance, 2009
Figure 2.6: Senior Euro bank redemption schedule, 2009
Figure 2.7: Expected senior unsecured vs. government guaranteed vs. SSA issuance (2009)
Figure 2.8: Approach to the provision of capital
Figure 2.9: Recapitalisation structure – the French example
Figure 2.10: S&P 500 Index, Mar 2000–Dec 2008
Figure 2.11: The preferred stock paradigm
Figure 3.1: Financial institution involvement in government guaranteed issuance, 2009 to date (%)
Figure 3.2: Financial institution involvement in non-government guaranteed issuance, 2009 to date (%)
Figure 3.3: Illustrative investor distribution for a new (euro) issue, 2009 to date (%)
Figure 3.4: European institutional investor activity, at the start of 2009
Figure 4.1: Global debt supply, by issuer sector, by year (2002–March 2009)
Figure 4.2: Global debt supply, by issuer sector, by month (January 2008 – March 2009)
Figure 4.3: Global government guaranteed bank supply, by investor market, 2008 to date
Figure 4.4: Senior unsecured supply (banks), by investor market, 2008 to date
Figure 4.5: Senior unsecured supply (insurance), by investor market, 2008 to date
Figure 4.6: Global hybrid debt issuance (non-government provided) – by issuer type, January 2008–March 2009
Figure 4.7: Subordinated financial institutions issuance – by issuer ratings, January 2008–March 2009
Figure 4.8: Global government-provided recapitalisation transactions – by deal type / by issuer jurisdiction
Figure 4.9: Subordinated supply (banks), by investor market, 2008 to date
Figure 4.10: Senior unsecured supply (corporates), by investor market, 2008 to date
Figure 4.11: SSA issuance in Q1 2009 (total €1.4trn)
Figure 4.12: SSA issuance trend since 2007
Figure 4.13: European sovereign CDS levels
Figure 4.14: Covered bond new issues
Figure 5.1: Primary technical foundations for structuring a hybrid security
Figure 8.1: Bloomberg Generic Subordinated Financials 5-yr
Figure 9.1: Global speculative default rates, 1989–2011
Figure 9.2: Developed country stimulus plans
Figure 9.3: General government total receipts and liabilities, 2008 (% of GDP)
Figure 9.4: Losses for the US banking sector (US$bn)
Figure 9.5: Bank balance sheet: an incomplete process
Figure 9.6: EMU: MFIs’ interest rates on new loans to the private sector
Figure 9.7: US interest rates, 1972–2011
Figure 9.8: ECB refinancing operations (€bn)
Figure 9.9: Federal Reserve's assets (US$bn)
Figure 9.10: 10-year government bond yields (%)
Figure 9.11: Risk aversion likely to remain elevated in H109
Figure 9.12: USD is overvalued against many currencies
Figure 9.13 Foreign investors could reduce buying of US securities
Figure 9.14: Speculative market has been very long USDs
Figure 9.15: US money velocity slides
Figure 9.16: QE and risk aversion to weigh on USD in H209
Figure 9.17: Actual minus estimate of 10Y rate – the QE premium?
Figure 9.18: Long-run 10Y Treasury yield
Figure 9.19: Austrian bank exposure to CEE (%, total €277bn)
Figure 9.20: 30-10Y swap curve spread
Figure 9.21: Euro sovereign supply progress, Q109 (%)
Figure 9.22: 3M Libor–OIS basis
Figure 9.23: OPEC oil production, Feb 2007–Feb 09 (Mbd)
Figure 9.24: Gold ETFs, 2003–08
Figure 9.25: US: household wealth, Q199–Q108
Figure 9.26: US: unemployment and inflation, 2006–2010
Figure 9.27: Federal Reserve balance sheet, 2007–09 (US$trn)
Figure 9.28: US: housing starts 1988–2008
Figure 9.29: US: housing stabilisation
Figure 9.30 Troubled US banking sector
Figure 9.31: US: deficit spending, 1994–2018 (US$bn)
Figure 9.32: US: household savings, 1988–2008
Figure 9.33: US: recovery forecast in 2010
Figure 9.34: US: public finances (% of GDP)
Figure 9.35: Different measures of the US fiscal deficit
Figure 9.36: US: GDP growth, 1980–2010
Figure 9.37: US: fiscal and current account balance 1980–2010 (% of GDP)
Figure 9.38: Composition of US fiscal deficit, 1962–2004
Figure 9.39: US: macroeconomic (im)balances, 1990–2008
Figure 9.40: Japan: economic growth, 2007–08
Figure 9.41: Japan: industrial production index, 1980–2008
Figure 9.42: Japan: unemployment rate, 1980–2008
Figure 9.43: Japan: public and private demands are supplementary
Figure 9.44: Japan: summary of past economic packages (JPYtrn)
Figure 9.45: EMU: rate of capacity utilisation, 1985–Q109
Figure 9.46: EMU: measures of inflation, 1997–Q109
Figure 9.47: ECB short-term interest rates (%)
Figure 9.48: EMU: public debt ratio to GDP, 1996–2007
Figure 9.49: EMU: stimulus packages and public deficits
Figure 9.50: EMU: public finance projections 2009–10 (ppt)
Figure 9.51: France: growth forecasts, 1992–2010
Figure 9.52: France: investment forecasts, 1992– 2010
Figure 9.53: France : unemployment rates, 1992–2010
Figure 9.54: Germany: GDP growth, 1960–2010
Figure 9.55: Germany: capacity utilisation and investment, 1995–2009
Figure 9.56: Germany: exports and new orders, 1992–2008
Figure 9.57: UK: new mortgages and house prices, 1990–2008
Figure 9.58: UK: industrial output and CBI survey, 1975–2008
Figure 9.59 : UK: inflation rates, 2001–10
Figure 9.60: Australia: GDP, 2000–08 (%)
Figure 9.61: New Zealand: trade balance, 2000–08 (NZDbn)
Figure 9.62: Canada: unemployment and GDP rates, 2008
Figure 9.63: Emerging markets: GDP growth, 1990–2010
Figure 9.64: Sovereign CDS spreads: China and Mexico
Figure 9.65: Sovereign CDS spreads: Russia and Turkey
Figure 9.66: Emerging Europe sovereign risk premium and stock market performance, Mar 2008–Mar 09
Figure 9.67: CEE: external debt as % of GDP, 2008
Figure 9.68: CEE: short-term external debt as % of total external debt, 2008
Figure 9.69: CEE: FX depreciation, Mar 2008–Mar 09
Figure 9.70: Russia: unemployment rate and real wages, 2000–09
Figure 9.71: Turkey: industrial production, 2004–08
Figure 9.72: Asian exports, 1999–2009
Figure 9.73: China: PMI, 2005–09
Figure 9.74: Government debt-to-GDP ratios
Figure 9.75: Oil-exporting countries’ foreign investment assets,
(% share, end-2007)
Figure 9.76: South Africa: headed for recession
Figure 9.77: Brazil: GDP growth, 2003–08 (%, YoY)
Figure 9.78: Mexico: economic indicators, 2004–09
Figure 12.1: The three-pronged approach
Figure 12.2: Areas of change
Figure 12.3: Expected senior unsecured vs. government guaranteed vs. SSA issuance, 2009
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