CORRECTED-Deutsche Bank deepens Tier 2 market, next stop Tier 1

Wed May 22, 2013 10:08am EDT

(Corrects third paragraph to state bond is SEC-registered and not 144a, and in the same paragraph that it priced at T+237.5bp, not 262.5bp)

* New 15 non-call 10 structure hailed a success

* European banks tipped to sell follow-up deals

* Additional Tier 1 seen as next step for Deutsche

By Aimee Donnellan and Danielle Robinson

LONDON, May 22 (IFR) - Deutsche Bank added yet more depth to the burgeoning bank capital market this week with the sale of a brand new structure for Tier 2 debt that should now pave the way for the bank to sell Additional Tier 1 bonds over the next 12 months.

Deutsche Bank, rated A2/A+/A+ at the senior level, issued USD1.5bn of 15-year non-call 10 subordinated notes in the Yankee market on Tuesday, drawing almost USD5bn of orders from some 250 investors. The distribution was dominated by the US, which took 70%, while Europe accounted for 25% and Asia 5%.

The SEC-registered bond, carrying issue ratings of Baa3/BBB+/A-, priced at Treasuries plus 237.5bp with a 4.296% coupon at par.

"Besides the final size and pricing, we were particularly pleased about issuing this 15NC10 callable structure with US investors, which is a first from a European bank," said Jonathan Blake, global head of debt issuance at Deutsche Bank.

A bullet structure would certainly have been a cheaper and easier sell but would not have given the bank the capital benefits it was looking for.

Deutsche Bank had considered selling a 10-year bullet, a structure that Standard Chartered opted for in January with a USD2bn issue.

That, however, would have provided only five years of maximum capital benefit, given that it declines by 20% per annum for the last five years of a bond's life.

After digesting feedback from investors during the seven day roadshow, Deutsche stuck with the planned 15NC10 format that provides 10 years of capital treatment instead.

The strong reception is good news for the German-based borrower, which is looking to boost its capital reserves further with the sale of around EUR1bn of AT1 capital in the next year.

The deal also offers further proof that investors are receptive to structures that have not yet been tried and tested.

Bankers are now confident that other issuers will be able to tap into what is rapidly becoming a more diverse pool of investor demand for bank capital deals, with an array of different bonds - including high and low-trigger CoCos and BBVA's multi-trigger AT1 - providing useful data points.

"This Deutsche Bank deal should open the way for other subordinated Tier 2 offerings out of Europe," said one banker.

CALL ME, MAYBE

Making the 15NC10 structure palatable to investors was not an easy task for Deutsche Bank, which tarnished its reputation in December 2008 when it failed to call a Lower Tier 2 bond.

That action, the first by a major European bank, still sits uncomfortably with some investors.

"Anything with a call from Deutsche Bank you can pretty much take with a pinch of salt," said a London-based portfolio manager, who did not participate in the transaction.

"With this kind of structure, you would want it priced to maturity and certainly want a premium."

To compensate for this extension risk, Deutsche added an extra 25bp-37.5bp, which pointed to fair value at around 220bp-232.5bp.

A 10-year bullet sub debt deal would likely have come at around 200bp, based on the view that a new Rabobank 10-year subordinated debt deal would come at around 195bp in dollars.

Deutsche's offering performed well in the grey market, quoted at 228bp-225bp, the tight end of the 225bp-240bp range some US investors and bankers not involved in the deal had calculated as fair value.

This was the first time Deutsche had come to the US for capital securities since 2006, and for price discovery investors were steered toward comparables like higher rated Rabobank's 3.95% 2022 10-year bullet subordinated bonds, trading at a G-spread of 184bp, and Nordea's subordinated 10-year bullet, at G+183bp. (Reporting by Aimee Donnellan; Editing by Natalie Harrison and Philip Wright)

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