As reported by Reuters , it would seem that the government has tabled an amendment to the Stability Law that would allow banks to strengthen the regulatory capital by issuing hybrid bonds, without thereby suffer the tax consequences arising from extraordinary gains that would ensue in the event of conversion of the bond into equity.
Basically hybrid bonds are a number of innovative financial instruments connotations halfway between debt instruments (bonds) and equity risk (equity).
Hybrid bonds, having a higher seniority to equity instruments (shares), but subordinate to all bond issues,in the event of bankruptcy of the issuer, the shares are redeemed first, but only if you have paid all other bonds.
Typically these particular bonds are issued by banks for their great benefits that derive from this tool, both in relation to the shares to bonds.
The advantages for issuers are varied and represent a means of collecting funds very attractive in comparison to the issuance of equity or senior debt.
If companies reperissero capital with senior debt would worsen their credit more debt means more default risk for lenders. Hybrids, as lower emissions with seniority, have a risk and therefore a different rating that does not get worse than the senior titles. The hybrid tranches, in fact, may not be refunded or go into default without the interests of the senior bondholders are affected. This feature is especially useful for obtaining the necessary financial resources in the event of major acquisitions. Or, as in the present case, just to strengthen the quality of bank capital, affected by the suffering that emerge as a result of the protracted crisis. Although it does not dilute the ownership interests of shareholders in the event of capital increases is avoided so that the majority shareholders or consortia must buy new shares to maintain control. The shareholders also do not suffer reductions in profit, with more outstanding securities, would be divided between more members.
It ‘clear that in a moment of extreme difficulty for the banking system-in the throes of suffering colossal that erode the heritage-the use of this financial instrument will strengthen the heritage of better quality, the common equity tier 1 (CET1).
In fact, in the case of conversion of hybrid bonds in banks’ balance sheets emerge within the contingent that compensate for the resulting reduction of the debt. These contingent, being the proceeds of an extraordinary nature, contribute to the formation of income and therefore are subject to taxation for IRES purposes that the IRAP. So the banks, in some way, suffer a tax burden which is an obstacle to the conversion of hybrid bonds.
The amendment proposed by the Government states that:
“The higher or lower values resulting from the implementation of specific contractual provisions of the financial instruments [regarding capital adequacy] does not contribute to the formation of the taxable income of the issuer for IRES and IRAP.”
In practice, the text, ensuring tax neutrality in these types of operations, removes the tax obstacles that have so far disincentivavano banks to strengthen the regulatory capital through the use of such tools and then through the conversion of bonds into equity.
It ‘also clear that this measure, being yet another intervention in favor of the banking system, there is also concern that meanders in government circles and the fragile financial conditions prevailing in much of the banking system.
Posted by Paul Cardena
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