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September 5, 2009

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RBS not to exercise options on bonds

ROYAL Bank of Scotland will not exercise options to redeem more than US$1.5 billion of subordinated bonds next month after regulators blocked using state aid to repay investors in the bank's low-ranked debt.

The action by RBS, 70 percent owned by the United Kingdom government, shows how regulators and policy makers are trying to ensure investors bear some of the cost of bailing out troubled banks.

The decision was taken in consultation with the European Commission, which has stated that, where possible, banks receiving government cash should not use this to make payments to their investors.

"Although it is the Financial Services Authority which officially objects to these calls (repayments), the decision has been taken in consultation with the European Commission," ING credit analysts said in a note to investors.

Swaps widen

"A sell-off of LT2 (Lower Tier 2) bonds issued by banks which have submitted a restructuring plan will be seen on today's (Friday) news," they said.

Five-year credit default swaps on RBS subordinated debt widened by around 20 basis points to 325 basis points, a trader said.

Five-year CDS on RBS senior debt widened by around 6 basis points to 131.50 basis points, Markit data showed.

The Markit iTraxx five-year subordinated financials index was 2 basis points wider at 177 basis points, the trader said. The index had widened by more than 5 basis points soon after the RBS announcement.

"The concern is could other UK banks be forced to follow suit by the regulator," strategists at BNP Paribas said. "However, the general feeling is that the reaction could mellow out as these are in fact relatively small issues."

RBS's four bonds are: two Upper Tier 2 notes for 400 million euros (US$570.8 million) and 100 million euros and two Lower Tier 2 notes for A$590 million (US$495.8 million) and A$410 million.

Future decisions by RBS on whether or not to redeem bonds will also be subject to consultation, the bank said.

"As well as circumstances prevailing at the time, pending the European Commission's decision on RBS's restructuring plan," the bank said in a statement.


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