LONDON, April 29 (IFR) - Deutsche Bank finally lifted the lid on one of the market’s most hotly anticipated Additional Tier 1 transactions on Monday evening, announcing plans for a multi-currency deal that will raise a minimum of 1.5bn.
The offering, due to come after a roadshow next week, will be the third step in a co-ordinated series of measures the bank announced on April 29 last year to further strengthen its capital structure. It should also pave the way for other German banks, which could sell as much as 15.4bn in AT1 notes in the coming years, according to Moody‘s.
“Everyone has been waiting for this trade and my guess is that Deutsche will want to try and take a decent slug out of the market,” a banker said. “I think this will be a blow-out and that they’ll get 3bn-4bn done and that it will be large.”
Deutsche Bank has said that it intends to raise about 5bn of CDR4 compliant AT1 by the end of 2015. The deal follows a 3bn equity raise in April last year and a US$1.5bn Tier 2 priced in May 2013.
“Deutsche is quite late to the AT1 party and has got quite a lot to do, so it will try to do a reasonable chunk at the first attempt,” another banker said. “That would be the sensible strategy.”
Details on the final shape of the offering have yet to be released, but the deal will include up to three currencies, potentially making it a market first.
Credit Agricole is the only other bank to have opted for a simultaneous currency execution, pricing a dual-tranche AT1 in early April which took 1bn and £500m out of the market.
Lloyds has also printed more than 5bn in the format, but that was part of an exchange, and so did not truly test demand for a brand new issue.
Banca IMI, Barclays, Commerzbank, Danske, ING, Lloyds, Raiffeisen Bank International, Santander, Societe Generale, UBS and UniCredit have been appointed as joint-lead managers to help Deutsche sell the bond.
The deal will follow a series of investor meetings running from May 5 to May 9. There will only be one team on the road, meaning that all the meetings will be in Europe and the bank will not be visiting Asia.
Back in 2012, the Asian investor base was one of the key components for distribution of banks’ new-style hybrids, although this demand waned during 2013.
Euros, sterling and US dollars will be the currencies considered by Deutsche, although in the case of dollars, the bank has said that any trade would be issued under Regulation S only and thus may not be offered, sold or delivered within the United States.
The lender said the notes will have a temporary write-down at a trigger level of 5.125% transitional Common Equity Tier 1. Deutsche reported a 13.2% transitional CET1 ratio on Tuesday morning, which drops to 9.5% on a fully-loaded basis.
As well as the size of the offering, market participants are also eyeing how Deutsche handles questions surrounding potential coupon deferral on the trades.
Coupon payments on AT1 instruments are fully discretionary, and once they have not been paid, are lost forever.
Furthermore, AT1 instruments are subject to profit distribution restrictions once a bank begins eating into its capital conservation buffers, which prevents it from making discretionary distributions.
There is nothing stopping a bank from not respecting the capital hierarchy once it starts eating into these buffers and prioritising shareholders over AT1 holders.
“Deutsche has shown in the past that it is driven by economics so any investor buying the AT1 will have to take that into consideration,” one banker said.
Back in 2008, Deutsche Bank angered investors when it said it would not call a Tier 2 issue for economic reasons, breaking market convention of issuers always retiring these deals at the first opportunity, even if it did not make sense financially.
In August 2013, Deutsche Bank further tarnished its reputation with a decision not to call a Tier 1 bond at the earliest opportunity.
“The 2008 decision and what followed will be relevant in the context of discretionary coupon payment and expectations are that there will be a lot of questions on that, but I am sure management will have an acceptable answer for investors,” one banker said. (Reporting by Helene Durand, Editing by Sudip Roy, Julian Baker)