(Adds pricing, book size)
By Danielle Robinson, Aimee Donnellan and Helene Durand
LONDON/NEW YORK, Nov 18 (IFR) - Deutsche Bank on Tuesday priced US$1.5 billion of bonds that convert into equity, fortifying its capital strength and its leverage ratio in particular.
The perpetual non-call 10-year Contingent Convertible or CoCo priced at 100.065 to yield 7.5%, in line with guidance. It was sized at the upper end of the US$1 billion to US$1.5 billion range flagged to investors.
The self-led deal attracted US$3.6 billion of interest from more than 230 investors, half of which were US domestic accounts unable to participate in Deutsche’s ground-breaking May issue of sterling, euro and Reg-S only dollar AT1s that raised the equivalent of 3.5bn.
Of the rest, around 25% was sold into Asia and the rest into Europe.
With today’s US$1.5bn deal, Deutsche is just shy of completing its objective of raising 5bn of CoCos and improving its leverage ratio to 3.5% by the end of 2015 from 2.4% at the start of 2014.
“It’s the last leg of the capital raising plan,” said analyst Jacques-Henri Gaulard at Scope Ratings.
Like the bank’s previous CoCos, the new issue is perpetual but will be temporarily written-down if the bank’s Common Equity Tier 1 ratio falls below 5.125%, consistent with other continental European banks.
Like many other borrowers that hit the bond market on Tuesday, however, Deutsche was unable to pull in pricing from guidance levels.
Market participants pointed to signs that investor demand is buckling under the weight of the US$88.475 billion in issuance so far this month.
The Deutsche CoCo was first marketed at a coupon of 7.5% area, nearly 1.5 percentage points higher than Swedish lender Nordea paid for a bond with a matching maturity in September, even though Nordea’s bonds have a much higher 8% write-down trigger.
One market source said Deutsche could have achieved tighter pricing but opted to stick with the 7.5% yield and raise the maximum amount of the trade.
“I think it (DB’s pricing on top of whispered levels) was a matter of the market just being overwhelmed with so much supply, and the fact that investors know there are some huge deals in the pipeline,” said one banker not directly involved in the deal.
Alibaba is expected to issue a potential US$8bn debut deal in the US market this week, and medical device maker Medtronic will begin roadshowing a jumbo financing on Friday to help raise the US$16bn of debt it needs for its US$42.9bn acquisition of Covidien.
“It’s hard for (investors) to step up and buy bonds in front of that,” said the banker.
The new Deutsche AT1 floats at mid-swaps plus 500.3bp if it is not called in year 10, and then resets every five years thereafter over the five-year mid-swap rate.
At 7.5% the deal offers about a 25bp concession over its outstanding 6.25% Reg S only perpetual non-call fives with a first call date in April 2020.
That deal was part of May’s three-currency AT1 transaction and was quoted at a yield-to-call of around 6.5% on Tuesday. Adding 75bp to account for the trading difference between a non-call five and a non-call 10 would suggest fair value at around 7.25% for the new deal.
Some investors compared the trade with French banks like Societe Generale and Credit Agricole.
SocGen has a 7.875% CoCo trading at par with a yield-to-call of 7.72%, while Credit Agricole’s 7.875% AT1s were quoted at US$103.00 with a yield-to-call of 7.2%.
The difference between Deutsche Bank’s Common Equity Tier 1 ratio of 14.7% and the CoCo’s 5.125% trigger is nearly 10 percentage points, the widest distance of any issuer.
But according to Simon Adamson, an analyst at CreditSights, Deutsche has less in the way of retained profits, which raises the risks the coupon might not be paid.
At Ba3/BB/BB+ with Moody’s, S&P and Fitch, Deutsche Bank’s CoCo is not considered investment-grade by credit ratings agencies, unlike Nordic banks like Nordea at BBB+/BBB, with S&P and Fitch. (Reporting by Danielle Robinson, Aimee Donnellan and Helene Durand; Additional reporting by Thomas Atkins; Editing by Alex Chambers, Natalie Harrison and Marc Carnegie)