Investors tire of Deutsche Bank non-call trend
* Tier 1 call failure could lead to higher capital costs
* Investors reminded of Tier 2 call saga
By Aimee Donnellan
LONDON, Aug 21 (IFR) - Deutsche Bank further tarnished its reputation with investors this week with a decision not to call a Tier 1 bond, a move market participants say is likely to lead to higher capital raising costs for the German SIFI.
The bank had until Tuesday evening to inform bondholders if it was going to redeem its 5.33% Tier 1 euro deal at the first call date - 19 September - but has decided not to exercise the option, leaving the instruments outstanding and counting towards its bail-in buffer.
Although the bank is infamous for being the first major financial institution not to call a Tier 2 bond, the latest move came as something of a surprise to bankers given Deutsche's plans to plug a capital hole with EUR6bn worth of hybrids.
"I don't understand why an issuer would anger investors in this way when it's likely to impact their capital costs in the future," said a London-based capital expert.
Investors agreed, saying it would definitely impact their view of the credit.
"Investors are pricing in this failure to call, which means that if the price isn't right they won't participate," said a senior portfolio manager.
"Deutsche Bank is one of the few high profile banks in Europe that has a reputation for calling bonds on a purely economic basis."
Deutsche confirmed that the bonds had not been called but declined to comment further.
FOOL ME ONCE
Deutsche Bank in 2008 became the first major European bank not to call a Lower Tier 2 bond, a decision that still sits uncomfortably with a number of investors.
Earlier this year, bankers estimated that Deutsche had to pay an extra 25-37.5bp on a new 15NC10 Tier 2 deal to compensate investors for the perceived risk of their bonds not being redeemed at the earliest opportunity.
"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."
This kind of thinking once again had an impact on the credit, with the Tier 1 bond's cash price falling from 93.00 on Tuesday to open Wednesday morning below 90.00.
This tempted in some cautious buying over the course of the morning, according to a trader, sending prices back to 91.75 on the bid.
The wider market reaction to the call failure was relatively muted, however, with the iTraxx Subordinated Financials index 4bp wider at 225bp by Wednesday afternoon.
RBS analysts argue that it actually makes sense for Deutsche Bank to hold onto the instruments despite the European Banking Authority in July stating that these instruments will be treated as expensive senior debt in the future.
"..banks have an incentive to keep Tier 1 bonds outstanding in order to provide an 8% cushion before bail-in rules would cover senior debt, even though they would no longer count as capital under Basel III," said Alberto Gallo, head of European macro credit research at RBS.
"In our analysis, Deutsche Bank has among the highest incentive to keep Tier 1 debt outstanding in order to reach this 8% threshold." (Reporting by Aimee Donnellan; Editing by Julian Baker)
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