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Erste Group subordinated bonds

What are subordinated bonds?

Subordinated bonds are long-term obligations with a fixed or variabel coupon payment.

Subordination means that in case of the issuer's insolvency claims made by the holder of a subordinated bond will only be fulfilled once all other claims by non-subordinate creditors (e.g. investors holding covered bonds or "normal" senior bonds) have been satisfied. Due to the higher risk of subordinated bonds, the interest rate of a subordinated bond is higher than the interest rate of non-subordinated / senior bonds.

Banks generate capital resources - tier 1 and tier 2 capital - by issuing subordinated bonds. Mostly subordinated bonds belong to tier 2 capital.

How do subordinated bonds work?

A subordinated bond offers a regular coupon payment which is higher than the interest rate of a senior bond. The coupon can be fix or variable depending on the product type. At maturity the bond will be redeemed at 100% of the nominal value if there is no premature redemption due to legal and/or fiscal changes. In case of an early redemption investors receive a payment of 100% in terms of nominal value.

The creditworthiness of the issuer is essential. The statutory loss sharing involves measures by the regulatory authority to stabilize banks in critical situations. The recapitalisation or the winding-up of credit institutions may involve the reduction or write-off of the nominal value and the conversion into equity. In this case the investors of subordinated bonds may lose their right to redemption and, in case of conversion into equity, may be expropriated. The regulatory framework and supervisory steps may have significant effect on investor rights and may negatively affect the market value of subordinated bonds even before the occurrence of economic inviability or winding-up.

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