Systemic risk reduction comes at a cost
Norges Bank 14 november 2018
Jens Ulltveit-Moe Umoe
more aggressive restructuring
processes
Systemic risk reduction
Ease of handling when fully served
Easy to custom made structure and risk profile
Less predictable in distress
Complex to amend due to unknown owners with
unknown agenda
Easy to create complex
structures becoming toxic in distress
Advantages comes at a cost
Shifting risk from systemic risk to stakeholder and
process risk
R e gu la te d B an k M ar ke t B o n d /H e d ge F u n d M ar ke t
Simple, unsecured bond struture made value-creating
restrccturing possible
Bondholder positions and CDS plays prevented timely
restructuring at high cost to most stakeholders
According to Reorg Research reports, secured bank debt traded at discount to hedge- funds to transform traditional bank lending to a hedge-fund play
Effect of risk shifting depend on
circumstances
2007/17 2011/16 2015/19
15-17% recovery for takers of 2015 exchange offer
Fully repaid in June 2016, possibly by insolvent borrower
69% recovery from sales proceeds from Oceanwood’s takeover Unsecured 0
2%
Unsecured
>10%
Unsecured
>12%
Secured Margin
Security
2011 bond raised to buy time in 2011 2015 SSN raised with hedge fund/
CDS writer support to avoid default in 2015
Same loan used to trigger default and take-over in 2018 Driven by credit interests, CDS play or control play?
Investment grade High Yield High Yield
demise powered by bond
market
Bonds are superior in fair weather
• Reduces systemic risk in the banking sector
• Convenient source of funds
• Low cost
• Freedom from followup
But introduces new risks in corporate
oBoards and CFO’s unaware of implications of new financing structures.
oLike banks, but only when all is well
oIn a crisis profoundly different oArms length dealing oUnknown holders of debt oShort horizon
o Cashing in on debt bought at a discount oValue maybe shifted between stakeholders
oIntransparent tools, oCDS
oExpensive short term loans oExpensive,
ono incentive to keep costs down oEquity lost or out of control ‘
oAvailability of bonds with high yield and toxic terms (too)tempting in a crisis
ounsustainable debt structures,
opotentially leading to large and unjustified value transfers between stakeholders