UPDATE 2-Deutsche Bank plans Tier 1 issue, reopens market

Mon Aug 24, 2009 9:55am EDT

* Market talk of 9-10 pct yield - analyst

* Aimed at retail investors - analyst

* Clearly less than 1 bln euro in market test - source

* Tier 1 issues expected from other banks

(Adds ratings, comments paragraphs 8-10, 14-15)

By Jane Baird

LONDON, Aug 24 (Reuters) - Deutsche Bank AG (DBKGn.DE) plans to raise new Tier 1 debt in a deal that could reopen Europe's market for hybrid subordinated financial issues as banks seek to rebuild balance sheets in the wake of the financial crisis.

The German bank confirmed it planned to issue euro fixed-rate perpetual notes, with annual call dates beginning from March 2015, and said it was managing the issue.

The deal would be the first of an expected series of new Tier 1 notes to hit the market in coming months from banks that have not needed government bailouts. [ID:nLU678785]

The deal would be smaller than 1 billion euros ($1.4 billion) as the bank was seeking to test the market's appetite for this type of issuance, said a source familiar with the plans.

The new issue is aimed primarily at retail investors, and talk in the market puts the yield at 9 to 10 percent, said a fixed-income analyst who did not wish to be identified. That compares with its perpetual notes in the secondary market that were priced to yield around 8.25 percent last week.

"I would be surprised if the deal were not a success," even though some institutional investors have said they resent the bank's decision not to call existing subordinated debt issues, the analyst said. [ID:nLP613178].

APPETITE FOR RISK?

Tier 1 notes, also called hybrids, are a cross between debt and equity. They are typically perpetual securities with call dates, which a bank can ignore. A bank also can stop paying interest on them without triggering a default.

Another analyst said he was surprised Deutsche Bank is leading the way back into this market after having sent prices into a tailspin in December.

"They are doing it as a retail deal to shore up their capital ratios," the analyst said, adding that retail investors would need to be aware the bank could decide not to repay the bond on the call dates.

This year, Deutsche Bank has opted not to call at every opportunity that a call date for a subordinated issue, Tier 1 or Tier 2, has come up, he added.

The first analyst said, however, "Retail investors are looking for a high coupon and don't mind extension risk."

As for interest payments, some crisis-hit banks have stopped paying coupons at the instigation of governments or the European Commission.

But because Deutsche Bank has not needed a government bailout, the risk of an EC-driven coupon deferral is low in this case, the first analyst said.

Deutsche Bank's Tier 1 ratings are all investment-grade.

Standard & Poor's rates its Tier 1 debt at BBB+, three notches below its A+ senior debt rating; Moody's Investors' Service at Aa3 or two notches below Aa1 for senior debt; and Fitch Ratings at A+, one notch below its AA- senior debt rating.

For Deutsche Bank, these notes are a non-dilutive way of raising core Tier 1 capital, and even though they have become more costly, they may still be cheaper than raising equity, the first analyst said.

(Additional reporting by Philipp Halstrick in Frankfurt; Editing by Karen Foster, John Stonestreet)

($1=.6990 Euro)

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