Euro banks embrace liability management extension trades

European banks are starting to change strategy on liability management, using extension trades to push back the maturity of bonds and get greater control over their outstanding debt. A tool long utilised by corporates, the extension trade is now being embraced by financials to cope with today's uncertain environment, in which issuance windows open and shut abruptly.
"Extension trades allow issuers to manage their upcoming redemptions," said Graham Bahan, head of liability management at Citigroup in the EMEA region. "When they buy back a short-term bond, they in effect accelerate the redemption date of the bonds to make it match with the appropriate time to issue." In the trade, the issuer typically swaps bonds maturing in up to two or three years for longer-dated paper with similar features and yields.
In contrast to liability management trades in which banks repurchase their bonds at a steep discount to generate core capital, the extension trades have two main advantages: they provide greater control over the issuance/redemption schedule, and they help reduce negative carry. This week saw two European financials, Banca Popolare di Vicenza and Finland's Sampo, use variations of the extension trade.