The bank is offering investors in its disqualified tier two bond 50bp to agree to add Basel III compliant features to the documentation, including point of non-viability language.
But the real ace up Isbank’s sleeve — and the reason bankers on the deal think investors will agree — is that if investors do not consent, the bank can call the bond at par.
Investors are hopping mad.
Since rumours of the disqualification surfaced earlier this year, the bond has fallen from trading at a cash price of 109 to around 101 in fear of the call being exercised.
Now, they argue, they are being corralled into agreeing to changes that will mean the bond will trade 100bp wide to the old style tier two curve, based on comparables, or 6pts in cash, but they are only being offered 50c for agreeing to the changes.
The disqualified tier two bonds, which are currently acting as very expensive senior debt for Isbank, are not now trading at market value because of the worry about the call option being exercised. That should mean less of a price decline if the bonds are converted, but Isbank has still done undeniably better than its investors out of the deal.
The nice thing for Isbank to do would be to offer more to convert the deal.
It is clear from coverage of the bond when it was priced that the deal was sold with the expectation from arrangers and investors that the note would be grandfathered, with gradually reducing capital treatment, not disqualified.
Despite what it said in the docs, this was clearly the basis upon which the bond was issued. But does Isbank have to offer more? No.
And why should it? The banks managing the exchange reckon that Isbank could have even gotten away with offering less. The offer it has gone out with may anger a few bondholders but time and time again, EM investors have shown themselves to be a forgiving bunch, quick to forget issuers’ errant behaviour as they eye the next juicy coupon.
The threat of future punishment should not leave Isbank quaking in its boots.
When the $400m 7.85% 2023s were sold in December 2013, investors had enough information at their disposal to be aware of the risks involved — the assumption may have been that the bond would gradually lose capital treatment when grandfathered, but the call option if it was disqualified was written clear as day for anyone to see (page six in the offering circular, with a mention on page one).
This bond was the only capital instrument sold from Turkey that year, which it is why it is now the only one disqualified, but it was sold and bought in the full knowledge that Basel III format would be enforced from a month later and with no confirmation that grandfathering had been agreed.
The terms are harsh but they are fair. Once again, making money in the capital markets — and especially in buying high yielding emerging market assets — is at investors’ peril.