DUBAI/LONDON: Burgan Bank, Kuwait's third-largest lender by assets, will redeem $730 million in subordinated bonds denominated in US dollars and Kuwaiti dinars as they will not be eligible to boost the bank's capital under Basel III rules, it said on Tuesday.
After the announcement investors dumped the affected dollar-denominated bond, with its spread widening by more than 200 basis points (bps) over equivalent US Treasuries in the space of a couple of hours, due to a lack of clarity over the process.
Under Basel III rules, being phased in around the world to help prevent a repeat of the global financial crisis, there is a greater focus on Tier 1 — or core — capital.
This means that instruments which boost Tier 2 — or supplementary — capital, like the bonds sold by Burgan, become redundant under the new rules.
In a bourse filing, Burgan said it had received central bank approval to redeem a $400 million bond currently due to mature in September 2020, which was sold through the Burgan Finance No. 1 (Jersey) special purpose vehicle.
The bond has a clause in its documentation allowing the bank to redeem the issue on or after Sept. 29, 2015, the statement added, although it did not give a date as to when the redemption would take place and at what price the bond would be redeemed.
This uncertainty caused the bond to widen to an implied spread of 546 bps over equivalent US Treasuries at 1025 GMT, up from 342 bps at the start of the day, according to data from Tradeweb.
"There's been some selling as people try to work out what level they are going to achieve for the redemption," said a bond trader who spoke on condition of anonymity as he was not authorized to speak to the media.
Burgan also has regulatory approval to buy back a 100 million-dinar ($330 million) 10-year bond maturing in December 2022, the bourse statement said. It did not disclose when the buyback would happen.
Responding to questions from Reuters, a spokesman for the bank said in an emailed statement: "We received the regulatory approval. However, no decisions have been made as yet and we are considering many options. We will go with the optimal approach that satisfies both the bank's capital needs, the shareholders and investors alike."
The bank did not state in either statement how it would pay for its action on the bonds.
Burgan Bank to redeem subordinated debt worth $730m
