The recent events involving Banca Marche, Banca Etruria, CariChieti and Cassa Ferrara and their subordinated bonds have taught savers that investing in these bonds is not to be taken lightly. The lesson was dramatic: everyone followed the painful story of the pensioner who committed suicide after losing his savings.
So here are 10 questions to ask (and to ask yourself) before buying a bank bond, to avoid incurring blunders and potentially lethal for your assets, small or large.
1) What kind of seniority does the bond have?
Learn about the various degrees of seniority and subordination of bonds, from Tier 1 junior subordinated bonds to senior secured bonds, because their risk is very different. In the event of a bank bail-in, the various types of bonds will be affected very differently, with different consequences for your investments.
2) What is the rating of the bond and the issuer?
Of course, the rating doesn't tell the whole story. Indeed, rating agencies have made huge blunders in the past, often lagging far behind the financial markets. But from there to say that the rating is completely useless, goes: it remains an important measure of default risk. Keep in mind that Investment Grade bonds, of medium-high quality, have a rating equal to or higher than BBB, while below this level we enter the world of High Yield, or speculative bonds, with a higher risk of default. So: be careful and aware of the rating of what you buy. The rating, if assigned, is indicated in the Product Sheet and in the Information Prospectus, which can generally be consulted on the bank's website.
3) Is it listed and liquid?
First of all, check that the proposed bonds are listed on a regulated market, such as the MOT or the EuroTLX. If this were not the case, in order to sell them before the deadline, you would essentially have only one possible buyer: the bank that sold them to you. The same bank may not be willing or in a position to buy them back. So avoid unlisted securities if possible, because they risk turning into a trap for your savings. It is also essential to look at the values traded and the trading "book": they offer important information regarding the liquidity of the stock. A semi-empty or empty book means that the bond is illiquid because there are few people willing to buy and sell the bond. Also note how wide the bid-ask (or bid-ask) spread is. Better to look at it than the price, i.e.: 100x (ask price – bid price)/mid price. If this number is too large, i.e. if we are not talking about basis points (e.g. 0,25%) but about percentage points (e.g. 2%), it means that the security is rather illiquid. Which means that if the need arises, selling it and getting your money back might not be a walk in the park. AdviseOnly calculates a synthetic liquidity indicator, which summarizes all this information in a number between 0 and 100.
4) What are the implicit charges?
The remuneration for those who issue a bank bond with savers is given by the implicit charges: costs declared in the prospectus, but which are not obvious to the inattentive buyer. But they can be high and have a heavy impact on the investment result.
5) Is it a structured title?
Structured securities are securities that pay coupons or repay principal based on the performance of a basket of securities, financial indices or foreign currencies, sometimes in a complex and not very intuitive way. In my opinion, they should be avoided, because they are often more risky (and in any case usually not particularly profitable). Never buy what you don't understand.
6) Is it a perpetual?
Perpetual bonds have, in essence, no maturity. They are normally highly subordinated securities, ie with a high risk of being penalized in the event of bank difficulties or default. Draw the consequences for yourself…
7) Is it convertible?
There are bonds that allow the issuer, ie the bank, to convert the bond into shares – we have also talked about this, with the case of the Veneto Banca bond. For some time now, it has been increasingly easy to come across Coco bonds: convertible hybrid bonds that automatically transform into shares of the bank that issued them under certain conditions, linked to a negative balance sheet performance of the bank (more precisely, if the "core Tier 1 ratio" falls below 5%). In this way the bank lightens its debt exposure. But the bondholder is penalized, because he finds himself bearing the risk of a bank action that is going badly. Better to avoid, what do you think?
8) How is the coupon calculated?
You must be clear whether the coupon is fixed rate, variable or mixed rate (fixed plus variable or variable with minimum and maximum). All other things being equal, in fact, a fixed-rate coupon is riskier than a variable-rate one, because it lengthens the duration of the bond, increasing sensitivity to interest rates.
9) How much more does it yield than a BTP of the same maturity?
Obviously, the bonds of an Italian bank are only worthwhile if, with the same maturity, they yield more than an Italian government bond: perhaps the bank is more solid than the state? Mmmhhh. However, if the spread, i.e. the difference in yield between the two bonds, is very large, it means that the bank bond is much riskier than the government bond. So weigh the pros and cons carefully.
10) Do I already have other securities from the bank?
This is a question you must ask yourself. Maybe your bank has been able to make you subscribe to too many of its bonds. This violates elementary portfolio diversification rules, excessively concentrating investments.
