UniCredit Investors Already Fuming Want Coupon Flub Answers

It was Euroclear’s fault, but the latest twist in UniCredit SpA’s coupon fiasco is exacerbating investors’ frustrations with the bank.

The drama began last week. Chief Executive Officer Andrea Orcel -- who’s been in the job a little over a month -- surprised bondholders when he decided not to pay a coupon of about 30 million euros ($37 million) due this week on legacy bonds, on the grounds that the bank made a loss last year. Investors had been assured on earnings calls this year that it would be honored.

Then, just days later as investors were still absorbing the news, it emerged that some holders had in fact received notice of payment. It turned out to be a Euroclear error. The firm that specializes in the settlement of securities transactions is now seeking to reverse the credits.

“It’s a sad saga and inevitably will have consequences for its reputation, though it’s too soon to tell the impact on its cost of funding,” said Filippo Alloatti, a senior credit analyst at Federated Hermes. “It’s a little bit premature to put it all on Orcel or the management team but I’d like to see a statement from the CEO explaining the decision process.”

UniCredit Investors Already Fuming Want Coupon Flub Answers

For Orcel, the debacle is denting what would have been another signal of a high-energy start to his tenure. In just over a month in charge the Italian has already slimmed down the management ranks and cut down on co-head structures to simplify decision making -- all while embroiled in a high profile court case in Spain over millions of dollars in lost pay.

The decision not to pay the coupon for the 2.98-billion-euro note risks alienating investors just weeks into his time in charge. Debt investors didn’t see the move coming, and the step sent bonds plunging. The bonds fell more than 1.35 cents on the euro to about 50.3 on Wednesday, according to prices compiled by Bloomberg.

“The issuer’s reputation suffers from this kind of approach,” said Andreas Meyer, a fund manager at Aramea Asset Management, who oversees more than 2 billion euros in bonds including UniCredit’s. “We will be very critical at UniCredit’s next issue and take this incident into consideration when deciding whether to invest.”

The bank wasted no time in testing investor appetite, tapping the dollar-bond market with a $2 billion offering on Wednesday. The debt was sold even as recent events had deterred some investors including Federated Hermes, which holds the bank’s CASHES bonds, from even considering participating in the issue. The order book had reached as much as $7 billion across two tranches earlier in the day in New York before the sale was wrapped up, according to a person familiar with the deal.

UniCredit Investors Already Fuming Want Coupon Flub Answers

Even though blame for the latest mishap can be laid at Euroclear’s door, it only happened because UniCredit surprised investors in the first place, said Jerome Legras, a managing partner and head of research at ‎Axiom Alternative Investments, which also holds the Cashes bonds.

Last week, the Italian lender had sent a notice that it decided not to pay the debt coupon to Mediobanca SpA, its main depositary bank, and Mitsubishi UFJ Investor Services & Banking (Luxembourg) SA, which is acting on a fiduciary basis on the notes, according to people with knowledge of the matter.

Mitsubishi alerted the settlement agents including Euroclear about the decision, before the erroneous transactions were processed, the people said. Euroclear informed clients on May 19 of the news, but “due to an internal processing error, nevertheless provisional credits were made and became visible to clients,” it said in a statement to Bloomberg.

It’s embarrassing for UniCredit, “even if it isn’t their fault,” said Legras.

A spokesperson for UniCredit declined to comment beyond an earlier statement in which the bank reiterated its decision not to settle the coupon, and it hasn’t given anyone a mandate to do so. A spokesman for Mediobanca declined to comment, and MUFJ Investor Services didn’t respond to a request for comment.

UniCredit’s CASHES, short for Convertible and Subordinated Hybrid Equity-Linked Securities, are highly complex securities issued more than a decade ago in the aftermath of the financial crisis. Investors in this type of legacy bond contend not only with unpredictable decisions by lenders, but also labyrinthine regulations and often-tortuous terms that can be interpreted in different ways.

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