Dexia and ING allowed to call subordinated debt

Good news for European financials comes as European regulators allowed both Dexia and ING call an upper tier-two and lower tier-two bond, respecitvely.

BNP Paribas analysts note that this is positive for banks as it shows that not all banks will be faced with restrictions on calling their tier-two debt, as has been the case with KBC and Royal Bank of Scotland. The FSA recently did not allow RBS to call some of its upper tier-two and lower tier-two bonds, and KBC was also barred from calling its tier-ones by the EC.

At the moment, RBS’s lower tier-two bonds are attractive. The euro-denominated lower tier-two, 4.625% bonds are trading at a z-spread of around 520 basis points, which is 180bp wider than the bullet 4.35% 2017 bonds. The 4.625% bond yields 6% to maturity, although a call in 2016 would yield 8.2%. The bullet bond, in comparison, yields around 6.5%. Moreover, the callable bond appears more attractive given that the seven-year subordinated credit default swap currently trades at around 253/263bp, analysts say.