Banks line up for slice of Deutsche hybrid business

Fri Jul 26, 2013 11:50am EDT

Related Topics

* Capital houses offer Tier 1, Tier 2 and CoCo ideas

* Bankers pin hopes on reciprocity trade

* Regulatory hurdles to stall issuance for minimum 6 weeks

By Aimee Donnellan

LONDON, July 26 (IFR) - Global capital houses are sidling up to Deutsche Bank to get their hands on what they hope could be EUR6bn worth of hybrid capital business if the bank breaks with its tradition of self-led deals and mandates outside experts to help.

Deutsche Bank is looking to begin filling a gaping capital hole in the coming months as European and US regulators continue to criticise the bank for having an insufficient cushion to handle another crisis, banking sources said. Further clarity is expected to emerge when second quarter results are released next Tuesday.

With just four days to go, a number of capital powerhouses are scrambling to offer the bank a range of choices in a bid to win the all-important mandates.

"Deutsche Bank is planning to issue a lot of capital, so it would make sense for them to hire banks that can offer a different viewpoint, have underwriting capabilities and who will be able to support trading," said a senior DCM banker.

Tier 1, Tier 2 and contingent convertible (CoCo) instruments are currently being discussed for deals that could emerge as early as September, bankers said this week.

YOU SCRATCH MY BACK

The hopes, however, are pinned on the German lender breaking away from self-led deals. All of the EUR4.75bn-equivalent Tier 1 and Tier 2 deals it has sold over the past five years have been self-led, according to IFR data.

Bankers argue that Deutsche would not only benefit from outside expertise, but would also have a better chance of involvement in its peers' capital issues, thereby improving its own business through reciprocity.

Reciprocity is already becoming an important part of the bank capital business. UBS hired 13 lead managers to sell its low trigger CoCo in May, and since then, bankers have been using that as a cheat sheet on which banks are likely to emerge in the capital space in coming months.

UBS's USD1.5bn Tier 2 CoCo priced with a 4.75% coupon and was sold by UBS's own syndicate team, as well as via Banca IMI, Barclays, BBVA, Credit Agricole CIB, Danske, HSBC, ING, Lloyds, Mizuho, RBS, Santander and UniCredit.

UBS paid fees of 1.25% for the USD1.5bn deal, according to a banker involved, which works out at USD18.75m. Broken down, it gave its own syndicate team around 50%, and the remainder was divided between the other 12 banks depending on their underwriting commitment.

The same fee structure applied to Deutsche Bank's EUR6bn hybrid target would mean a potential EUR75m payout to be divided in a similar manner amongst its own syndicate and the Street.

"UBS and Deutsche Bank are at opposite ends of the spectrum, but in the end capital issuers are all going to have to go one way. You can't have a bank doing self-led deals and expecting to get reciprocity business from others," said another DCM banker that is in talks with Deutsche Bank.

REGULATORY HURDLES

Before any of this business is awarded externally, Deutsche Bank has to gain further clarity on the regulatory treatment of certain capital instruments, which is expected to be in the next six weeks.

The bank is believed to be considering a number of options.

"It would make sense for Deutsche Bank to issue Additional Tier 1 debt because it would be the most cost-efficient way to improve their leverage ratio, as well as their broader Tier 1 capital requirements," said Simon McGeary, head of the new products group at Citigroup.

The market is currently awaiting confirmation that a tax charge on any writedown gain on a Tier 1 bond does not result in any upfront reduction in its capital treatment.

The Capital Requirements Regulation (CRR) does not provide full clarity on this, and the question is being considered by the European Banking Authority (EBA) through its new Q&A website.

In practice, most situations where a writedown occurs would involve substantial losses, which would be likely to shield any gains from tax.

For the past few years, Deutsche Bank has focused its efforts on Tier 2 instruments, and issued a USD1.5bn 15-year non-call 10 note in May on the back of nearly USD5bn of orders. (Reporting by Aimee Donnellan; Editing by Natalie Harrison and Julian Baker)

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