Deutsche Bank’s bond forays seem never too far from controversy these days.
To wit, this story, from the FT:
Deutsche Bank has become the latest big European institution to tap retail investors for funding, as it announced plans to sell up to €500m ($717m) in new hybrid bonds.
The sale is being closely watched as a potential sign of rebuilding confidence in the market for bank capital. It is particularly interesting because it follows Deutsche Bank’s decision earlier this year not to call back its outstanding hybrid bonds, which upset institutional investors.
Indeed, it is interesting, since Deutsche’s December 2008 decision to not call one of its LT2 bonds — €1bn worth of 3.875 per cent 2004/2014 subordinated or hybrid bonds, basically threw the bond market into hysteria.
The market had been expecting Deutsche to call the notes, at par, at the first available date — January 16th. That’s what banks tend to do with these sort of bonds — redeem and reissue on a regular basis, with the capital raised going towards their Tier 2 ratios. However, in December DB decided not calling the bonds would be a prudent move in terms of funding — replacement costs would have been more expensive than the existing Euribor 88bps step-up coupon.
Deutsche’s decision, however, still sparked an outcry from investors. For instance, Dresdner analysts accused them of “storming one of the last bastions of presumed behaviour in the credit markets” while others called for an outright boycott of DB bonds.
So has that December decision now come back to haunt the German bank? Is it being forced to tap retail investors for its next round of funding rather than institutional ones? We’re not sure.
Retail investors have been buying more bonds in Europe of late, and research by RBS shows that deals denominated in notes worth 1,000 each, rather than the usual 50,000 size, typically outperform in the secondary market because of the retail bid. In fact, institutional investors may still pile into deals, even if they think they’re priced too high, because they believe the retail interest will drive the prices even higher.
Deutsche’s new bonds will reportedly be sold in €1,000 parcels, and the retail-line is certainly the one being touted by the FT:
One person close to the offering said retail investors were being targeted because the pricing was more attractive and that, despite the threatened buyers’ strike, institutional investors had also already placed orders for the bond sale.
However, there are others who think DB is being a little more devious. Via Reuters:
“They are doing it as a retail deal to shore up their capital ratios,” the analyst said, adding that retail investors would need to be aware the bank could decide not to repay the bond on the call dates.
Related links:
European retail investors fuel bond-buying boom – FT
Of Deutsche bonds and conspiracies – FT Alphaville
Deutsche Bank faces buyer strike over bond move – FT