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UniCredit silent after new letter from hedge fund questions key capital buffer

Italy's UniCredit SpA has refused to respond to further demands from London-based hedge fund Caius Capital LLP that it clarify the terms under which it treats the proceeds of a convertible bond issue as equity.

In a second letter to UniCredit, delivered since the bank sought to reassure investors at its first quarter results on May 10 over its use of a particular kind of bond as Tier 1 capital, Caius has asked UniCredit to provide confirmation that the relevant regulators have approved its actions.

Common equity Tier 1 capital is the key measure of capital which the bank must hold on its balance sheet to protect depositors,

Caius has asked UniCredit to explain the terms under which it uses €2.98 billion of convertible and subordinated hybrid equity-linked securities, or cashes, as Tier 1 capital.

The hedge fund said unless the bank could provide reassurance that the relevant regulators had approved these instruments, then the bank must convert the cashes into ordinary shares which would impose heavy losses on investors. Caius has also said cashes create a restriction on cancelling dividend payments on ordinary shares making them ineligible for Tier 1 capital.

Caius asked for confirmation that the European Banking Authority had approved the way UniCredit treated cashes and that the EBA had confirmed cashes had no effect on UniCredit's use of ordinary shares in its Tier 1 capital.

Caius's letter also called for the agreement under which cashes are recognized as ordinary shares for the purposes of Tier 1 capital to be published.

Finally, it asked that if the EBA decided UniCredit's treatment of cashes should change if the bank would automatically convert the cashes into ordinary shares.

The letter, seen by S&P Global Market Intelligence, to UniCredit CEO Jean Pierre Mustier, was also copied in to the EBA and European Central Bank banking supervision arm, the Single Supervisory Mechanism.

In response to the letter, UniCredit directed inquiries to its previously published reply of May 10 to the first letter in which it had noted that "cashes shares capital treatment is compliant with applicable regulations."

Caius is likely to gain from the situation since it has taken a position betting against the cashes but it has said it is reporting its concerns to the authorities to fulfill its role as "responsible investor." It previously raised similar issues with the West Bromwich Building Society which subsequently swapped the cashes out for new instruments, that were later approved by U.K. regulators.