Some readers asked me how I think a distressed exchange offer for
banks look like? Basically not much different than how a coercive
exchange works when applied to other corporates but here are my
1) it will be coercive (since no bondholder would be willing to
2) it will to a very large extend wipe everything subordinated to senior
all types of pref. stock, hybrid securities, subordinated debt etc.. This
shock to holders of such kind of instruments will most likely shut down
the market for this type of instruments but the capital structure of banks
will most likely tend to become much more simple (including senior and
3) regulators will have to push banks to do such exchanges because they won't
do it on their own. one key prerequisite is that those banks with a need to
re-capitalize mark their assets down to market, book all loss reserves
needed and show full transparency (yes we can).
4) this will show the amount of equity capital needed to bring the bank on a
firm footing (min of 10% equity)
5) during the time of an exchange offer government should guarantee all
depositors, all counterparts (incl. CDS) and continue to support the bank
to fund its operations
6) the exchange offer should include new debt which is senior (maybe secured)
to the old senior debt. If changes in the cap and or corporate structure are
needed to achieve this so be it. However, most banks do not operate under
the most strict debt covenants which block them from achieving this.
7) the exchange offer should put pressure for a limited amount of time on
bondholders to exchange as many bonds needed to re-capitalize the bank.
There are more ways to do this but one example would be. Each bondholder
exchanging old debt gets new (senior secured) debt with a haircut plus equity.
bonds not willing to exchange will be subordinated by each other bond
8) after a sufficient number of bonds exchanged from debt to new debt plus equity
the temp government can be released and the show can go on.
I think this is attractive since no more tax-dollars or increased government
debt would be involved. Some may fear that insurance companies will get wiped
out since they hold a lot of bank debt but the same scheme could be applied to
those who can't stand this.
Wednesday, April 29, 2009
How do I think could a distressed exchange offer for banks look like?
Posted by Bud Fox at 5:50 AM