Bradford & Bingley skip bond coupons – is this legal?

We’ve had a question from a reader of this blog about yesterday’s announcement that Bradford & Bingley will be skipping coupon payments on some of its bonds and whether this constitutes an event of default.

Actually it doesn’t, and why not?  Well, because HMT says so…

Back in February the government made changes to the terms of its nationalisation of B&B, using power it gave itself under the new Banking Act.  HMT amended the Transfer Order through which B&B was nationalised to explicitly allow non-payment of coupons on B&B’s Lower Tier 2 (LT2) dated subordinated debt, and to rank it pari passu with preference shares in liquidation.

This meant that from that day onwards B&B LT2 instruments had NO event of default (neither coupon non-payment nor non-repayment of principal count as events of default), making them effectively Upper Tier 2 (UT2) instruments in every way (it was always the case that banks could defer interest payments on UT2 debt in certain cases), except that they now expressly ranked pari passu with preference shares in liquidation.

B&B had already said it would only make payments until the end of May, and after that would submit a restructuring plan that was unlikely to see any payments being made to subordinated debt holders. So yesterday’s announcement that it won’t be paying coupons on three of its Tier 2 securities (one lower T2 and two UT2 bonds with a nominal value of around £325m), which have coupon dates in July, came as no surprise.

The only continuing confusion is whether this triggers an event of default on subordinated bond Credit Default Swap (CDS) contracts, and if so, whether this credit event would also apply to the senior CDS as well. Trader speculation is rife, with varying interpretations, but no clarity yet from the trade body ISDA.  The CDS market remains an immature one, and stressed events like this nationalisation show that participants need to be very cautious about the protections that they think they’ve bought or sold.

 

Discuss Article

  1. Anonymous says:

    How on earth can the protection market continue to function when the insurers doesn't know the precise extent of their liabilities and the buyers aren't certain that the events against which they want to be insured will actually be covered.
    On reflection, thinking back on my experience with insurance claims I've yet to settle a claim without argument following settlement offers well below what I believed I was insured for.

    On a quite separate note but topical, the Nationwide's housing stats out today, at least their headline figures and how they have been reported bear no relationship to reality in this area which is traditionally strong for house prices. Sales are almost non existent and when made the prices are well below the original asking level.

    On the ground it looks much much worse to me than the fall in the 90's and I suspect the true position has still to be revealed ie prices have significantly further to fall.

    Posted on: 29/05/09 | 12:00 am
  2. Anonymous says:

    In reference to 'restructuring plan that was unlikely to see any payments being made to subordinated debt holders'. I have not seen this document but would like to. Can you direct me to where I might find it?

    Posted on: 04/06/09 | 12:00 am
  3. Gordon Harding says:

    B&B actually never explicitly stated they would not make payments on their sub debt after the end of May (or 2nd June to be precise). What they did say in an RNS statement (following on from HMT's announcement that the Transfer Order through which B&B was nationalised was being amended to allow non-payment) was that they would make payments until 2 June, implying they would not make payments thereafter. See below for the statement:

    Bradford&Bingley PLC   BBN    Subordinated Notes & Bonds
    2009-02-25 11:56:41.448 GMT

      Bradford&Bingley PLC BBN Subordinated Notes & Bonds

       RNS Number : 8653N
       Bradford & Bingley PLC
       25 February 2009
        

    Posted on: 04/06/09 | 12:00 am
  4. Gordon Harding says:

    B&B actually never explicitly stated they would not make payments on their sub debt after the end of May (or 2nd June to be precise). What they did say in an RNS statement (following on from HMT's announcement that the Transfer Order through which B&B was nationalised was being amended to allow non-payment) was that they would make payments until 2 June, implying they would not make payments thereafter. See below for the statement:

    Bradford&Bingley PLC   BBN    Subordinated Notes & Bonds
    2009-02-25 11:56:41.448 GMT

      Bradford&Bingley PLC BBN Subordinated Notes & Bonds

       RNS Number : 8653N
       Bradford & Bingley PLC
       25 February 2009

       Bradford & Bingley plc

       25 February 2009

       £150,000,000 Floating Rate Dated Subordinated Notes due March 2054  (ISIN:
       XS0215817718)

       £55,000,000 13 per cent. Perpetual Subordinated Bonds (ISIN: GB0002228939)
       £150,000,000  6.462   per   cent.  Undated   Subordinated   Notes   (ISIN:
       GB0031670762),
       each issued by Bradford & Bingley plc (the "Company") 

       The Company has resolved to pay in full the interest payment which  is due
       in respect of its:

       (i)          £150,000,000 Floating Rate Dated Subordinated Notes on their
       next interest payment date (31 March 2009);
       (ii)        £55,000,000 13 per cent. Perpetual Subordinated Bonds on their
       next interest payment date (7 April 2009); and

       (iii)      £150,000,000 6.462 per cent. Undated Subordinated Notes on
       their next interest payment date (2 June 2009).

       The Company will notify noteholders and bondholders accordingly.

        

    Posted on: 04/06/09 | 12:00 am

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