* 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
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 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
(Reporting by Aimee Donnellan; Editing by Julian Baker)