Caius Capital is calling for certain equity-linked securities issued by UniCredit to be made ineligible as Tier 1 capital under EU regulations – potentially leading to gains for the fund, which has taken positions against the securities.
The London-based distressed debt specialist – run by former Och Ziff partner Antonio Batista and ex-Goldman Sachs head of EMEA prime brokerage advisory Will Douglas – has written to the European Banking Authority calling for an investigation into the regulatory treatment of the instruments in question: a €2.9bn issue by UniCredit of convertible and subordinated hybrid equity-linked securities, or CASHES, dating from 2008.
The hedge fund wants the securities to be converted into ordinary UniCredit shares, which would resolve the issue and save the lender some €125m annually in bond payments – leading to gains for Caius, but potentially hefty losses running into the billions for instrument holders.
The CASHES are not on the EBA’s public list of approved CET1 instruments, according to the firm. It believes up to ten breaches of the capital rules may have been made – with just one violation enough to render the whole transaction ineligible under Tier 1 requirements.
In the letter to the EBA, seen by EuroHedge, Caius says UniCredit currently discloses €609m of the proceeds received under the CASHES as eligible as Tier 2 capital under the fully loaded application of the EU’s Capital Requirements Regulations, with the remaining €2.3m classed as CET1 – a ranking structure not permissible under the complex rules that make up the CRR.
Similarly, issues stemming from how the CASHES may restrict cancelled dividend payments on UniCredit’s ordinary shares may also rule shares themselves ineligible as CET1 – potentially affecting the Italian bank’s entire Tier 1 capital buffer and leaving it considerably undercapitalised.
The matter raises questions over how thoroughly the structure was reviewed by regulators.
In a statement, UniCredit acknowledged the Caius letter and said the regulatory treatment of the shares has been fully disclosed to the market and confirmed and reviewed by the competent regulators.
Caius raised a similar challenge in March 2017 relating to Profit Participating Deferred Shares (PPDS) held by West Bromwich Building Society as CET1 capital. The UK lender was ultimately forced to swap the instruments for other eligible securities.
The Caius Capital Master Fund, whose total AuM is undisclosed, generated a 30.4% annual gain in 2017, collecting the New Fund of the Year award for macro, fixed income and relative value strategies at this year’s EuroHedge Awards in London.