The Basel Committee on Banking Supervision's new capital plans, unveiled at the weekend, aim to make banks safer and prevent a repeat of the credit crisis.
The regime will be phased in in stages from Jan. 1 2013, but questions remain over the final shape of new hybrids that regulators want banks to hold. And in the meantime, some banks have hybrids to refinance.
Banks have used Tier 1 hybrid bonds in the past to help boost their capital. These instruments have equity-like characteristics, but are cheaper than equity partly because coupon payments have been tax-deductible.
Under the new Basel rules, regulators want them to be even more like equity, with more loss-absorbing features, making them more costly for banks to sell to investors who will want higher coupons for taking on the extra risk.
There are some 24 billion euros of Tier 1 bonds with redemptions coming up for European banks in 2010 and 2011, according to data from Bank of America Merrill Lynch.
These banks will have to decide whether to redeem them and replace them but the regulatory uncertainty will not make this easy.
Italian bank Intesa Sanpaolo, for example, has a 1 billion euro Tier 1 bond redemption due in November.
The Basel Committee has said only bonds issued before Sept. 12 should qualify for its transition arrangements.
"It looks to us as though only Tier 1s issued before the weekend will be grandfathered if they don't meet the new conditions," said Simon Adamson, analyst at CreditSights.
"Instruments issued from now onwards will only qualify for inclusion in Tier 1 if they meet the loss absorbency criteria laid out in the recent proposals and those proposals are open to consultation until the beginning of October," CreditSights also said in a note. "There is likely to be a hiatus in new issuance of hybrid Tier 1."
Uncertainty over the new Basel rules had kept a lid on new issuance of hybrids this year. But an upbeat mood in the bond markets this month has helped spur some deals.
Italy's Monte dei Paschi di Siena and Lloyds, for example, did Lower Tier 2 bonds earlier at the beginning of September.
More were expected to follow.
"You have a situation of ambiguity rather than clarity," said a capital specialist at an international banking group. "The Basel press release does not give clarity for deals in the pipeline," he said.
"Where issues are on an opportunistic basis they may be put on hold, but some banks could decide to go ahead as coupon levels are attractive at the moment."
