By Alice Gledhill
LONDON, June 7 (IFR) - UK banks' subordinated debt hastumbled as the threat of the country leaving the European Unionlater this month escalates.
Polls of polls on Sunday showed the Leave and Remain campssplit down the middle at 50/50, shaking up those that have beencounting on the UK staying in the EU.
Additional Tier 1 bonds have dropped up to three points inthe last week, while Tier 2 debt has also taken a knock.
That performance offers a glimpse into the potential impacta vote to leave would have on the country's banks, potentiallymaking wholesale funding costs unpalatable and storing upsignificant losses for investors.
"We are more nervous than we were; it doesn't look as clearcut now, though I think the market is still pricing in that wewill remain," said Paola Binns, a senior credit fund manager atRoyal London Asset Management.
She said the polls were undoubtedly the driver behind themoves. Further poll results on Tuesday gave "Remain" a narrowlead.
An exit would weigh on GDP, in which scenario banks tend tobe first hit, she said.
"The banks are probably being defensive ahead of potentialselling from investors after the change in the polls and justmark prices wider."
A 1.25bn Barclays 2.625% Tier 2 bond due November 2025 haswidened more than 60bp in the last week to swaps plus 395bp,according to Eikon, with one intraday move of over 20bp.
A 1bn RBS 3.625% Tier 2 bond due March 2024 also widenedmore than 50bp over the same period.
Mark Dowding, partner and co-head of investment-grade debtat BlueBay Asset Management, warned that financial markets hadbeen quite complacent in the view that "Remain" will win.
"It seems that investors would like to assume that commonsense will prevail and economic arguments will sway voters, yetour analysis makes us worry that for many voters this referendumwill be determined more by emotional factors than intellectualarguments," he said.
ROLLER COASTER RIDE
The widening is the latest instalment in what has been avolatile ride for UK bank bonds in 2016. They were hard hitduring the subordinated sell-off in the first quarter and laggedbehind the broader market recovery.
A number of fund managers across Europe started to reducetheir exposure to UK financial institutions earlier this year,though UK banks have issued around 46bn-equivalent in thesterling, euro and dollar markets year-to-date, according to IFRdata.
However, that window may now have closed. TSB met investorsrecently ahead of Lloyds Banking Group's sale of its £385m 5.75%Tier 2 2026s, though it did not specify a timeline for the dealand the roadshow was dictated by TSB management availability.
UK banks are broadly well positioned should their access tothe primary market be cut short given their strong capitalposition relative to most European and many global peers. TheBank of England said it would provide liquidity support in theevent of a run on the currency. (Reporting by Alice Gledhill, editing by Helene Durand, JulianBaker)
Barclays (BARC)
