UniCredit Bond Coupon Chaos Dents Orcel’s High-Energy Start

What was supposed to be a calculated show of strength by UniCredit SpA’s new chief executive officer is rapidly descending into a farce.

Andrea Orcel took the decision not to pay a debt coupon of about 30 million euros ($37 million) due this week on the grounds that the bank made a loss last year, even though investors had been assured of the cash. Yet some bondholders on Tuesday said they received notice of payment. UniCredit insists it didn’t pay it, raising questions about how the payment was made.

“It’s embarrassing for them of course, even if it isn’t their fault,” said Jerome Legras, a managing partner and head of research at ‎Axiom Alternative Investments. “But the truth is this happened because they took everyone by surprise.”

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.

UniCredit Bond Coupon Chaos Dents Orcel’s High-Energy Start

The bonds fell almost 0.5 cents on the euro to about 51.2 on Wednesday, according to prices compiled by Bloomberg. UniCredit shares fell 0.6% to 10.29 euros as of 10:38 a.m. in Milan.

What Happened?

It’s still unclear what happened with the coupon. The 2.98 billion euro bond’s complicated structure means that there are several players involved, and the error could have come from any one of them. The CASHES, short for Convertible and Subordinated Hybrid Equity-Linked Securities, have different banks serving as depository and fiduciary for the instruments.

It’s also possible that Euroclear paid the coupon into client accounts, or erroneously sent a code notifying clients of a payment. A Euroclear spokesperson declined to comment.

If it was an error and money was transferred to bondholders, it would raise questions over whether investors will need to return the funds -- and who will be on the hook for the payment if not.

“Even if it isn’t their fault, but of the depositary or fiduciary bank, the timing is very unfortunate,” said Paola Biraschi, an analyst at CreditSights. “They already incurred some reputational damage given the inconsistent market communication around the intention to pay the coupon. Investors will now want to understand the reasons behind the alleged payment of the coupon. And if any money was transferred, I imagine they will attempt to claw it back from bond holders.”

This type of mishap is rare in debt markets, though mistakes do happen. It recalls a battle between Citigroup Inc. and various investors after the U.S. bank accidentally sent half a billion dollars to a group of Revlon Inc. lenders last summer. It recently lost another round in its fight to reclaim the money. More recently, Spanish utility company Iberdrola SA misstated the interest rate on a newly-issued bond.

Highly Complex

Given the notes’ terms, the bank could also skip the next three coupons, even though 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 after reporting a loss or without distributing a dividend.

The notes 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.

They’ve already been the subject of controversy after a London hedge fund accused the bank of boosting its capital strength by misclassifying them. 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 bank’s Additional Tier 1 bonds, a newer-style capital security, were little changed. The CASHES are quoted almost 10 cents on the euro lower than prior to the news of the coupon skip last week.

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