Question
Article 489 of Regulation (EU) No 575/2013 (CRR) provides for the grandfathering treatment of hybrid instruments with a call and an incentive to redeem. A bank has issued a bond with a fixed coupon before the first call date and a floating rate coupon after the first call date. The credit spread of the fixed coupon as of the issuance date is the same as the margin of the floating rate coupon after the first call date, so there is no immediate step-up there. However, the floating rate coupon is floored at the level of the fixed rate coupon. Does this constitute an incentive to redeem ?
Background on the question
Some banks have issued such instruments and it is important to know the grandfathering treatment of these instruments.
Answer
Pursuant to Article 20(1) of Commission Delegated Regulation (EU) No 241/2014 an incentive to redeem shall mean all features that provide, at the date of issuance, an expectation that the capital instrument is likely to be redeemed. A floating rate coupon floored at the level of the initial fixed rate coupon, such as in the case described by the submitter, constitutes an incentive to redeem, as the new coupon after the first call date will always be equal or higher than the initial coupon.