Royal Bank of Scotland (RBS), which is 70 per cent owned by the taxpayer, has been blocked by the City regulator from making repayments on bonds worth £920 million. The Financial Services Authority (FSA) has told RBS that it cannot make a payment on the bonds next month because of its reliance on billions of pounds of taxpayers’ money to keep the bank afloat.
RBS, which received £20 billion from the Government last October, is in advanced negotiations with the European Commission over what remedies Brussels will impose on the bank in return for its state funding. The Commission is expected to force RBS to shrink its share of the small-business banking market, among other measures. Brussels is also in detailed discussions with Lloyds, which received £17 billion in state funding, and Northern Rock, which is nationalised. Rulings on all three banks are expected within the next couple of months. The Commission warned last month that it expected both shareholders and bondholders to absorb some of the pain in cases where the banks they have invested in would have collapsed if they had not been kept alive with public funds. RBS said yesterday that it had been told by the FSA that under the Commission’s “burden sharing” rules it could not make a payment to bondholders next month. Brussels has already intervened in several cases to spread the burden of bank bailouts to shareholders and bondholders of higher-risk subordinated bank debt. Northern Rock, which was nationalised in February 2008, said last month that it would defer interest payments on eight subordinated bonds with an aggregate face value of about £1.7 billion. The Commission ruled last year that Bayern, of Germany, could not pay out any interest on a Tier 1 bond, which ranks just above equity, as a condition for approving billions of euros in state aid. The Commission also told Anglo Irish Bank recently not to pay interest on Tier 1 bonds. KBC, the Belgian bancassurer, said last month that it would not pay interest on a Tier 1 bond pending regulatory approval of a restructuring plan and after discussions with the European Commission. In a reversal this week, however, the Belgian bank said that it would indeed pay coupons on certain outstanding Tier 1 bonds. For British investors, “the concern is other UK banks could be forced to follow suit by the regulator,” BNP Paribas analysts wrote in a research note. Last month the Commission laid out several rules for state-funded banks to abide by. Those rules “made it clear that banks subject to restructuring under state-aid rules should not use state aid to remunerate their own capital,” the FSA said yesterday. Paying out on those notes “would adversely affect the ongoing state-aid discussions in relation to RBS”, the FSA said. The RBS securities affected are two euro-denominated, upper-Tier 2 bonds, issued by National Westminster Bank, and two Royal Bank of Scotland lower-Tier 2 bonds, denominated in Australian dollars. Traders said that the cost of insuring RBS subordinated debt against default rose by about 0.3 percentage points on the news, while the cost of insuring senior bonds rose by about 0.15 points. -- Posted By anjos to Business Blog at 9/04/2009 11:11:00 PM [Non-text portions of this message have been removed]
