UniCredit Stuns Investors by Skipping Coupon Payment

With one of his first major moves at the helm of UniCredit SpA, Andrea Orcel added tens of millions to the bank’s bottom line. The question is whether the cost will be even higher in the long run.

UniCredit’s new chief executive officer shocked investors with a decision to skip a coupon payment on $3.6 billion of hybrid bonds due later this month, an abrupt u-turn after the lender had reiterated just weeks ago it intended to pay.

A net loss in 2020 meant the bank wasn’t required to make the payment under the bond’s terms, and it could skip the next three coupons to save about 120 million euros in total. That’s not small change for a bank that had 809 million euros of net income in the past four quarters.

Many debt investors didn’t see it coming, and the step sent bonds plunging. But Orcel’s gamble paying off will depend on whether the fallout is limited to the hedge funds that own the decade-old notes or causes a wider knock to confidence in the firm’s debt. The latter could prove costly as Orcel seeks to finance acquisitions to boost UniCredit’s flagging growth.

UniCredit Stuns Investors by Skipping Coupon Payment

“The fact they are not paying is crazy,” said Jerome Legras, a managing partner and head of research at ‎Axiom Alternative Investments, which holds some of the notes. “Why would we trust them on AT1 bonds?”

The decision is an early indicator that Orcel -- known for his work ethic and single-minded approach at UBS Group AG -- intends to continue in a similar vein at UniCredit. He’s already slimmed down the management ranks and cut back on co-head structures to simplify decision-making at the bank, while at the same time continuing with a lawsuit against Banco Santander SA.

UniCredit reviewed the matter of whether to pay the coupon after the recent management change, taking a decision coherent with the terms of the notes, a spokesman said by phone in response to questions on why the bank changed its mind in recent weeks.

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 even if it failed to make a profit or distribute a dividend.

UniCredit Stuns Investors by Skipping Coupon Payment

”We would advise investors not to buy on the dip, given the lack of clarity on the topic,” CreditSights analyst Paola Biraschi wrote in a note.

The CASHES bonds, issued more than a decade ago in the aftermath of the financial crisis, had already been the subject of controversy after a London hedge fund accused the bank of boosting its capital strength by misclassifying them in 2018. 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 bonds have fallen 10 cents on the euro to about 51 cents since Thursday afternoon, according to prices compiled by Bloomberg, the lowest since February.

UniCredit’s Additional Tier 1 bonds have already pared some of their losses from earlier Friday. The asset class is a sweet spot for investors because the deeply subordinated notes, which help absorb losses in a crisis, offer much higher yields than many other parts of the credit market. That may help offset the reputational damage to UniCredit from not paying the CASHES coupons.

Buyback Impact

“While this can be a negative surprise for the CASHES bond holder, this should not affect the bank’s ability to pay dividend on 2021 profit nor impact the announced buyback,” Azzurra Guelfi, an analyst at Citigroup Inc., wrote in a note Friday.

UniCredit plans to distribute 447 million euros in a mix of cash dividends and share buybacks on 2020 earnings to comply with the European Central Bank’s limits on capital returns. Once that ban is lifted, UniCredit plans an additional 652 million-euro buyback.

The bank earlier this month joined European peers in posting stronger-than-expected first quarter results amid a surge in trading and lower provisions for bad loans.

Mitsubishi UFJ Investor Services & Banking (Luxembourg) SA, which is acting on a fiduciary basis on the notes, couldn’t be reached for comment.

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