Sberbank, Russias largest bank, will exercise its five year call option of its $1bn 10 year subordinated 2015 notes next February in an investor-friendly move that has boosted market confidence in the banks balance sheet.
Markets had priced in Sberbanks refusal to exercise the call option and the 2015s have been trading to final maturity (at a higher interest rate) rather than the February 2010 call date. Analysts say the 2015s notes should compress by 10% on a fair value basis. Issuers close to the maximum allowable tier two capital limit in their capital structure typically opt to exercise the call option as market convention dictates while averting higher coupon payments on subordinated notes after the call date.
However, cash-strapped financial institutions globally have opted to not buy back debt in the face of weak balance sheets. Deutsche Bank, Spains Banco Sabadell and South Korea lender Woori disheartened investors by not calling back their subordinated debt contrary to market expectations.
"Sberbanks decision to call the option and announce this so early is a good, confident signal to the market," said one debt syndicate head at a Russian investment bank in London. The news is a "harbinger for similar actions by other large Russian banks," to follow suit, said Barclays Capital in a research note. It argues large Russian state backed institutions, such as VTB with its 2015 notes, will opt to replace foreign subordinated debt with cheaper local currency loans from Russian government lenders.
In the bull run, yield-hungry investors slid down credit curves of corporate borrowers in the region and snapped up short to medium-term deals with complex capital structures that offered three to five year call options. However, the market will not be tested until 2011 when issuers will announce their intentions to exercise their call options, said bankers.