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MILAN (Reuters) -UniCredit is leaning towards repaying a perpetual bond at the earliest opportunity in June, a source close to the matter told Reuters, in a move to show it has ample capital while keeping funding costs in check as markets reel from a crisis of confidence.
UniCredit in recent weeks put in a request with European Central Bank supervisors to repay a 1.25 billion euro 6.625% perpetual bond on June 3, the first opportunity it has to redeem it, the source said. The bond reversed earlier losses after the Reuters report to hit a session high of 97.
While UniCredit has signalled its intention to redeem the bond, it has until early May to make a final decision.
A supervisory source told Reuters that redeeming AT1 bonds is a good way to instil confidence in markets if banks have enough capital, which the source said was the case for UniCredit.
A spokesperson for UniCredit declined to comment. The European Central Bank declined to comment.
AT1 bonds are the riskiest type of debt banks can issue, ranking immediately after equity in the event of losses.
Such a hierarchy has been overturned by Swiss regulators who wiped out $17 billion of Credit Suisse’s AT1 debt under its takeover by UBS.
The decision has disrupted the $275 billion AT1 bond market, which had already seen yields rise in the wake of recent U.S. banking failures.
Investors have priced in the risk banks would will forego redeeming the AT1 bonds – which is standard market practice – given the cost of replacing them with new issues.
Yields have soared in particular on the bonds with a call date in the near future.
European rules require lenders to put in a request to supervisors to call an AT1 bond at least three months before the due date.
If UniCredit’s bond is not repaid the coupon would reset at 638.7 basis points above the five-year mid-swap rate, meaning the rate would rise above 9%.
