November 22, 2012 / 11:46 AM / in 5 years

UPDATE 1-DEPFA seeks to avoid Anglo Irish fate with new-style consent

(Adds downgrades by Moody’s of targeted DEPFA hybrids)

By Helene Durand and Chris Spink

LONDON, Nov 22 (IFR) - DEPFA Bank is hoping its new-style consent exit exercise, which could result in one of the most aggressive hybrid Tier 1 liability management exercises seen this year, will avoid bondholder lawsuits further down the line.

The bailed out German lender is seeking to amend the terms and conditions on three hybrid Tier 1 securities totalling EUR1.2bn so that it can retire them at a deep discount instead of calling them at par at the next call dates.

Yet, Moody’s downgraded the three perptual non-cumulative preferred secrities issued by DEPFA Funding II LP, DEPFA Funding III LP and DEPFA Funding IV LP to C(hyb) from Ca(hyb) on Thursday morning citing the bank’s move as a distressed exchange, which represents a continuing impairment to the bondholders.

The bank has structured its exercise differently to how the Irish banks did in 2010/2011 when they included exit consent measures designed to coerce non-consenting bondholders to take part in their distressed buy-backs.

A surprise judgement in the English High Court in August this year ruled that Anglo Irish Bank had acted unlawfully in November 2010 by using such a measure to coerce German credit investor Assenagon to tender its EUR17m of subordinated bonds for just EUR170 and sparked fears of a wave of legal action by disgruntled investors.

Instead, DEPFA is offering a 1% sweetener for bondholders who agree to a change in the terms and conditions of the bonds by December 18 ahead of the December 20 formal meeting deadline and will pay them 30% of face value.

If DEPFA gets at least a third of bondholders to approve, by a simple majority in each of the bonds, it will be able to redeem the rest at 29% of par, a far cry from what happened to the hold-outs in other Irish liability management exercises. The pricing is roughly in line with where the bonds had been quoted in the secondary market.

“It would appear that DEPFA has sought to close off issues that arose from the Assenagon decision in the English High Court regarding Anglo Irish Bank’s coercive tender offer to its subordinated bond holders. However, it is not clear if this will be entirely successful yet,” said Steven Friel, partner at law firm Brown Rudnick, which has been engaged by some bondholders in DEPFA.


His view was echoed by Simon Adamson, analyst at CreditSights, who wrote in a note that it was a way of instigating a coercive buy-back without the need to threaten hold-outs with a penalty.

According to a debt banker, the quorum DEPFA needs to get as well as the simple majority vote is a lot lower than what is normally seen on consent solicitations, where usually two-thirds of bondholders need to approve the changes with 75% voting in favour.

“If investors think they can sit back and do nothing and get away with it, they are wrong,” he said. “If you don’t like what DEPFA is doing, then you need to be pro-active.” He added that the low thresholds were legal.

DEPFA is targeting a 6.5% EUR400m perpetual issued by DEPFA Funding II LP, a 7% EUR300m perpetual issued by DEPFA Funding III LP, both of which have a call next year, and a 5.029% EUR500m perpetual callable in 2017 issued by DEPFA Funding IV LP.

In a statement, the bank said that consent was a voluntary, market-based approach which reflected the distressed nature of the securities.

DEPFA has not paid coupons on the bonds since 2009 and has already skipped calls on the deals.

“We think given the damage DEPFA suffered in the financial crisis and its stressed financial condition, a buyback of Tier 1 securities at 30% of par is as good as holders could have expected,” CreditSights’ Adamson wrote.

DEPFA could leave the bonds outstanding and continue not to pay coupon in perpetuity or until the bank recovers, but a successful exercise will create additional Core Tier 1 capital.

According to Adamson, if the consent goes through, DEPFA could make a EUR840m capital gain.

JP Morgan is acting as consent coordinator. (Reporting by Helene Durand and Chris Spink, editing by Alex Chambers, Sudip Roy)

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