Don’t call us we’ll call you

We have opined on many occasions about the call features on bank debt and have long argued that investors and issuers should price these securities on economic rather than emotional grounds (for more detail, see Jim’s blog on Deutsche Bank being the first not to call a Lower Tier 2 bond in 2008).

However, even we were surprised late last week when Intesa SanPaolo decided to amend the terms of some of its callable subordinated debt by removing the call option for each of the bonds.

The terms of a security are sacrosanct to bond investors. We obviously fear the terms of a contract being amended as this reduces our legal rights and the value of our securities. Therefore bond documents are carefully written, and a trustee generally acts as an arbiter to protect both the issuer and the investors’ interests. How can Intesa be allowed by the trustee to unilaterally change the terms of the bond?

The simple removing of the call option from the bond terms and conditions is not detrimental to bond holders. If someone has an option against you and cancels that option the text books and simple logic states that you can be no worse off, and the only party whose position is weakened is the one who has cancelled the option they had against the other party. So in theory as a bond investor you’re better off, so why complain?

The reason investors in these types of securities are concerned is that they were hoping that for reputational reasons the bonds would be called to keep them happy.  In many cases that long term care of reputation with regard to funding has been deemed an appropriate call (excuse the pun) for the bank issuer of these callable securities to make.

The companies that have generally not called securities in the past have been led by the likes of JP Morgan, Deutsche Bank, and US Bancorp. But none of them decided to remove the call option as that would be potentially detrimental to them. Indeed this week US Bancorp’s subordinated bonds matured due to them exercising an economically efficient call.  These non-callers continue to be able to fund and interact with the investors whose expectations were not met regarding their bond holdings.

In these difficult times it appears that banks are now more willing to act on a purely economic basis, which takes some of the hope out of the valuation of callable securities. The investor relations department of banks used to have a mantra of ‘don’t call us we’ll call you’. That is looking increasingly out of fashion.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Richard Woolnough

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