Bloomberg
UniCredit Stuns Investors by Skipping Coupon Payment
(Bloomberg) — UniCredit SpA’s Chief Executive Officer Andrea Orcel shocked investors with a decision to skip a coupon payment on $3.6 billion of hybrid bonds due later this month, an abrupt u-turn that risks eroding confidence in the bank just weeks after he got the role.The Milan-based lender won’t pay a quarterly coupon of around 30 million euros ($36.7 million) due May 25 because it reported a net loss for last year, one of the conditions under which it can miss obligations on the notes, according to a statement emailed to Bloomberg. The bank will also be able to skip the next three interest payments, saving about 120 million euros in total.The last-minute reversal by Orcel is one of his first big moves since taking over, and raises questions about the rationale for disappointing investors after the bank had reiterated just weeks ago it intended to pay. The notes recorded their biggest decline since October on Thursday and dropped further on Friday morning.The move also threatens to damage trust in UniCredit’s Additional Tier 1 bonds, a separate type of security that lenders are issuing to boost capital reserves.“The fact they are not paying is crazy,” said Jerome Legras, a managing partner and head of research at Axiom Alternative Investments, which holds some of the notes. “Why would we trust them on AT1 bonds?”The decision is an early indicator that Orcel — known for his work ethic and single-minded approach at UBS Group AG — intends to continue in a similar vein at UniCredit. He’s already slimmed down the management ranks and cut back on co-head structures to simplify decision-making at the bank, while at the same time continuing with a lawsuit against Banco Santander SA.UniCredit reviewed the matter of whether to pay the coupon after the recent management change, taking a decision coherent with the terms of the notes, a spokesman said by phone in response to questions on why the bank changed its mind in recent weeks.UniCredit took steps last year to update terms of the so-called CASHES, short for Convertible and Subordinated Hybrid Equity-Linked Securities, allowing it to pay the coupons even if it failed to make a profit or distribute a dividend.”We would advise investors not to buy on the dip, given the lack of clarity on the topic,” CreditSights analyst Paola Biraschi wrote in a note.The CASHES bonds, issued more than a decade ago in the aftermath of the financial crisis, had already been the subject of controversy after a London hedge fund accused the bank of boosting its capital strength by misclassifying them in 2018. The issue fizzled after the European Banking Authority sided with the bank, saying it found “no clear evidence” to support the hedge fund’s claim.The bonds have fallen 10 cents on the euro to about 51 cents since Thursday afternoon, according to prices compiled by Bloomberg, the lowest since February.UniCredit’s Additional Tier 1 bonds have already pared some of their losses from earlier Friday. The asset class is a sweet spot for investors because the deeply subordinated notes, which help absorb losses in a crisis, offer much higher yields than many other parts of the credit market. That may help offset the reputational damage to UniCredit from not paying the CASHES coupons.Buyback Impact“While this can be a negative surprise for the CASHES bond holder, this should not affect the bank’s ability to pay dividend on 2021 profit nor impact the announced buyback,” Azzurra Guelfi, an analyst at Citigroup Inc., wrote in a note Friday.UniCredit plans to distribute 447 million euros in a mix of cash dividends and share buybacks on 2020 earnings to comply with the European Central Bank’s limits on capital returns. Once that ban is lifted, UniCredit plans an additional 652 million-euro buyback.The bank earlier this month joined European peers in posting stronger-than-expected first quarter results amid a surge in trading and lower provisions for bad loans.Mitsubishi UFJ Investor Services & Banking (Luxembourg) SA, which is acting on a fiduciary basis on the notes, couldn’t be reached for comment.(Updates with details on coupons in second paragraph.)More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
