But investors are burned out.
After countless scandals, near-death collapses, bail-outs and bail-ins, Italian lenders are finding it increasingly difficult to attract investors. The amount of Italian bank bonds outstanding has shrunk by about 30% since the start of 2015, according to Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator.
The decline in volumes has been accompanied by rising yields on subordinated and senior unsecured notes. This is a big problem in a country where bonds represent an important share of banks’ liabilities, especially at a time when the big European banks are facing increasing regulatory pressure to issue ever larger volumes of what has come to be known as “bailinable (as in bail-in-able) debt.”
Bailinable debt traditionally consists of hybrid debt securities that automatically convert into equity and/or have their face value mercilessly slashed if some pre-defined trigger is met (usually linked to the issuer’s capital). It includes subordinated debt and high-risk instruments like the contingent convertible (CoCo) bonds that are designed to be bailed in first when a bank gets in trouble.
Bailinable debt comes into play when a bank is about to go belly up. Part or all of the debt can be used to “bail in” a bank’s investors before taxpayers are called upon to cough up the rest. It’s what should have happened from the early stages of the financial crisis. But for bankers there’s a big problem with this kind of debt: given its high associated risks, it normally comes with a hefty price tag, particularly if the bank in question fails to inspire confidence among investors. And that’s a common problem in Italy…