The deal, called Score, was cancelled in February, said a source. Money put up by bondholders would have been used to reimburse RBS if customers failed to pay up on a $3.2 billion book of derivatives trades, according to a November presentation. If no customers defaulted, bondholders would get their money back plus interest topping 15%.
The cancellation shows RBS misjudged the appetite for securities constructed like those that led to the 2008 financial crisis. While RBS described deals such as Score as a key tool to build capital after its government bailout, investors burned by about $420 billion of losses on subprime-backed collateralized debt obligations remain wary of intricate vehicles that promise outsized returns, the people said.
I dont know who would actually go out and purchase these, said Dan Rosen, chief executive officer of Toronto- based consultant R2 Financial Technologies Inc., which advises banks and investors on risk management. You have thousands of derivatives, hundreds of risk factors.
The bank abandoned the idea after a rally this year in corporate bonds reduced pressure on RBS, a person with knowledge of the decision said. An RBS spokeswoman, Rebecca Nelson, declined to comment. The Edinburgh-based firm, the UKs largest government-owned lender, received a 46 billion-pound UK rescue and has posted annual losses for four straight years, including 2011s 2-billion- deficit.
RBS is going to be under continued pressure to raise capital for the foreseeable future, said Glenn Blasius, CEO of Ovid Capital Advisors. Blasius said he couldnt imagine why the bank backed off just because the market rallied.