Bondholders in heavy weather – the case of SNS Reaal
A snow storm was blowing around our Law School last week. The financial sector seems to mirror current climatological extremes, as banking conglomerate SNS Reaal was nationalised two weeks ago.
Two weeks ago, the Dutch Minister of Finance decided to expropriate all shareholders and subordinated bondholders of SNS Reaal, one of the four largest financial conglomerates in the Netherlands. Interestingly, he did not touch senior bondholders.
Not only have they remained untouched, senior bondholders now have pari passu claims against a company in which the State freshly injected EUR 3.7 billion and which will be restructured, so that SNS Property Finance, the billion euro-bleeding subsidiary, will be isolated from the SNS Reaal group. But they have been lucky.
In his expropriation decision, the Minister left no doubt that, on the basis of the recently enacted ‘Intervention Act’, he would have been authorised to expropriate also the senior bondholders. Indeed, the Act states that the holder of any securities issued by the relevant financial institution may be expropriated. But Parliamentary proceedings suggest that the legislature had shares and similar instruments in mind, not ordinary bonds. Moreover, in Parliament, the Minister had said that the Act did not provide for ‘bail-in’, i.e. a forced write-down of bonds or a forced conversion of bonds into shares. And expropriation – from an economic perspective – amounts to ‘bail-in’: as a result of both expropriation and bail-in, the (ex-)bondholder loses his right to full repayment. The Minister concluded that it should be left to the European legislature to introduce bail-in as a resolution tool.
The Minister’s position made perfect sense, as the Dutch banking sector is financed for 20% with senior debt. Should the Intervention Act (expressly) have introduced bail-in, senior bondholders would thus hold riskier claims and therefore demand a higher interest rate on their bonds. This would, the Minister must have reasoned, not have helped the Dutch banking sector’s position. That his reasoning was not without merit showed in the week before SNS Reaal’s nationalisation: rating agency Fitch was not so sure about the fate of SNS Reaal’s senior bondholders, and threatened to reassess (read: downgrade) Dutch banks if it appeared that senior bondholders could be forced to accept major losses on their bonds.
The bondholder issue is not idiosyncratic for the land of dikes and tulips. In Denmark, for instance, senior bondholders were forced to accept losses after the collapse of Amagerbanken – with negative consequences for the Danish banking sector. Spain, on the other hand, has until now refused to infringe on bondholders’ rights. The European draft Recovery and Resolution Directive seeks to address this ‘unlevel’ playing field and provide harmonised rules for bank insolvencies, so that all Member States may write down bonds, convert them into shares, and reduce them to zero.
The bigger picture question is whether these harmonised rules would end the continuous spending of enormous amounts of taxpayers’ money on the banking sector. On the one hand, forcing bondholders to accept losses means these losses are not shouldered by taxpayers. As explained above, however, the possibility of bail-in will result in a rise of banks’ funding costs, which will be to the detriment of the already frail state the banking sector is currently in. Which might then require even more taxpayers’ money. Consequently, additional measures would be necessary. I would support European banking supervision, harmonised rules on the ringfencing of commercial bank activities from investment bank activities, and, most importantly, a common Eurozone redemption fund. While some form of European banking supervision seems to be politically feasible in the near future, the latter two measures are likely to be postponed to the future – well behind the cold front which still envelops Europe’s financials today.