Patrick spoke about the opportunity for capital gains in legacy bonds  in a recent Wed meeting: Commerzbank just announced that it will call on 30JUN20 a legacy Tier 1 (DE000A0KAAA7, 0.8% position in the EUR fund) at a price of 100%. The bond was trading at 95% prior to the announcement.

 We continue to see issuers redeeming legacy securities, illustrating the upside potential for investors as these are redeemed. After Santander’s call and many others before (Nordea, Danske, BPCE just to cite a few) we expect to see issuers take-out increasingly ineffective capital securities.

 Detail:

The background of the call is relatively straightforward – loss of Tier 1 value in Dec-2021 with only 63% of the nominal currently counting as Tier 1capital given the grandfathering cap (this amount decreases each year) and then loss of all Tier 1 capital value due to the SPV structure. CMZB had said they could potentially retain some Tier 2 value due to the specific SPV structure, however the call shows that either (1) very unlikely to be eligible as Tier 2 capital given the SPV structure (2) regulator is putting pressure on issuers to clean-up the capital structure, especially for bonds issued away from the resolution entity (3) even if eligible as capital (Tier 2 until 2025 at best) not that cheap and easier to replace with new-style capital.

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