LONDON (Reuters) - A surprise decision by Deutsche Bank DBKGn.DE not to redeem a subordinated bond at the first scheduled call date to save money hurt the subordinated bank bond market on Wednesday.
Deutsche Bank became the first big bank to say it would not exercise an option to redeem its 1 billion euro ($1.4 billion) Lower Tier 2 bank debt, due to mature in January 2014 but with a call date in January 2009, because the cost of doing so would be higher than paying a penalty of 88 basis points over Euribor for not redeeming the debt.
ING credit strategists described the move as an “horrendous cocktail” that would be a major market mover.
“This re-prices the financial segment again and will delay LT2 funding possibilities in general,” they said in a note.
“The fact that it was a frequent issuer with nothing but a cost goal in “only’ Lower Tier 2 makes things worse, a lot worse.”
Deutsche Bank’s subordinated cash bonds were bid at 85 percent of face value and offered at 95 percent, down from a bid/offer spread of 95/99 last week, a trader said.
The European iTraxx subordinated index widened out by more than 10 basis points to 230 basis points, he added.
SPOILING BOND ACCESS
Analysts have been concerned that European banks that issued so-called hybrid debt, a blend of debt and equity, soon after the introduction of the euro in 1999 would not redeem the debt on their first call dates coming up in the next two years.
The risk, however, had been seen on the lowest ranked Tier 1 bonds where issuers can opt to defer coupons or not to redeem the perpetual debt at all.
For Lower Tier 2 bonds, which rank just below senior bonds, the risk is that the debt is not redeemed at the early scheduled dates, usually set some five years before final maturity.
"The worry is about other banks that have call dates in January, like BNP Paribas," the trader said, adding that BNP Paribas BNPP.PA subordinated bonds were still bid at 95 percent of face value.
“In a way it is a shrewd move as they (Deutsche Bank) imply that they will buy back the bonds, and this move will make it cheaper for them to do that, but on the other hand it will spoil their access to this market,” he added.
Deutsche Bank said that “in light of the fact that the early redemption option is not in-the-money,” the appropriate balance of constituent interests is served by not calling the notes.
Many banks have recently used global government guarantee schemes to raise funding in the bond market, after the Lehman Brothers' LEHMQ.PK bankruptcy in September dried up new issuance.
Only a handful have issued bonds without relying on a state guarantee.
Those include senior deals from BNP Paribas, Credit Suisse CSGN.VX and Intesa Sanpaolo ISP.MI. Only Credit Agricole CAGR.PA has issued subordinated bank debt in the past few months, raising 250 million pounds ($389 million) via a 15-year Lower Tier 2 bond last week.
Editing by David Cowell
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