The new Banking Bill, which was enacted last month, gives the Government the power to allow Bradford & Bingley and Northern Rock change the terms of existing subordinated debt. They can, if they choose, skip coupon payments on bonds without triggering a default or even move a bond within the entity.
A spokeswoman says: “This is something we are watching carefully. We understand why the Government wants this power, but we need clarity and certainty as this could have an affect on the pricing of bonds going forward.”
Dennehy Weller and Co. managing director Brian Dennehy says if the banks do choose to skip coupon payments it could have huge repercussions on the whole financial sector: “It would have a lot of knock-on affects, not just with corporate bondholders, but also for life and pension funds,” he says.
Pensions expert Ros Altmann says: “We could have a major problem here, especially if this is extended to other banks’ bonds.”