Remember when Deutsche Bank decided not to call one of its LT2 bonds last month? The consequences are still filtering through the system.
This was from Bloomberg on Monday, citing a Moody’s statement putting a €153m CDO issued by Rosetta I SA on review for possible downgrade:
Jan. 5 (Bloomberg) — Moody’s Investors Service says it may revise the way it rates some collateralized debt obligations backed by bank subordinated bonds after Deutsche Bank AG’s decision last month not to redeem 1 billion euros ($1.4 billion) of securities.
Moody’s said it may make the change because widening spreads on bank bonds means it’s “uneconomical for financial institutions to call their perpetual debts, as evidenced by” Deutsche’s skipped call date. As a result, the New York-based ratings company said it may “revise its CDO modelling assumptions in terms of call probability for perpetual debts.”
This is very true — the coupon of the bond in question was set to move from 3.875 per cent, to 3 month Euribor plus 88bps. At the time of the announcement, that would have equated to just over 4 per cent — a small increase when refinancing bank debt has become extremely pricey — if not impossible. So instead of calling in the notes (at par) after five years (January 2009), as the market expected, DB decided to keep them going until 2014.
Unsurprisingly, Deutsche’s failure to call the bond led to a flurry of outcries from investors — now locked into lower yields.
Analysts at Dresdner for instance, seemed to be calling for a stand of some sort against Deutsche. From a Dec. 18 note:
On top of this, some investors have suggested they will shun all Deutsche paper, senior and subordinated, short and long term, as a mark of annoyance. That could have far reaching implications if sufficient investors joined a strike. On the other hand, if Deutsche is ‘encouraged’ to change its mind then other banks are unlikely to not call bonds in 2009 and normal service may be resumed.
Of course, few have much confidence in the ratings agencies anymore, but the fact that Moody’s is revising its CDO ratings based on DB’s decision suggests the ‘normal service’ described by Dresdner above will not be resuming any time soon. Investors, like Moody’s, may well have to start assessing LT2 bonds on a yield to maturity rather than a yield to call basis.
Something they maybe should have been doing all along.
Related link:
Of Deutsche bonds and conspiracies – FT Alphaville