Deutsche pulls in big AT1 demand after non-call decision
Deutsche Bank attracted some €10bn of demand for a €1.5bn perpetual reset April 2031 Additional Tier 1 on Monday, just days after announcing its decision to skip the upcoming call of a US$1.25bn 4.789% AT1.
The new issue comes after Deutsche Bank announced on Friday that it will not call its US$1.25bn 4.789% AT1 next month, extending the bond for a second time, while it also announced that it will redeem at the first opportunity a US$1.5bn 7.5% AT1.
Investors had been braced for a potential non-call after Deutsche officials, on an earnings call in January, flagged the foreign exchange loss that would be incurred if it were to redeem the bonds, and after the bank said it would take a deal-specific approach to AT1 calls in 2025.
Unsurprisingly, the decision to extend the bonds – in a market where the majority of issuers routinely redeem bonds at the first opportunity – dominated much of the conversation around the new issue.
The nuances of the decision led to some debate among market participants over whether it could be categorised as being "less friendly" to bondholders, yet it was quickly evident that it had not stopped Deutsche from attracting substantial demand, as it built a peak order book that covered the size of the deal seven times over.
Sole bookrunner Deutsche Bank marketed the deal with initial price thoughts of the 7.75% area. Around two and a half hours after books opened, the bank announced that demand had surpassed €9bn.
It went on to set the coupon at 7.125% and the size at €1.5bn, on the back of more than €10.5bn of demand. The final book stood at around €10bn.
Some bankers away from the deal said the level of demand, coming so soon after the non-call announcement, reflected the maturity of the AT1 market.
"The market has matured to the point now where people don't throw their hands up in anguish if somebody's not calling an instrument," said a syndicate banker away from the deal.
"It does demonstrate that banks are capable of executing more active management strategy of their Tier 1 stacks and that it doesn't cause the same type of investor anxiety or animosity as it perhaps used to."
Some market participants said the non-call of the US$1.25bn 4.789% AT1 was of limited direct relevance to the new euro-denominated offering, given the decision was seemingly driven primarily by the potential FX loss.
The US dollar bond, which was issued in 2014, is accounted for as an equity instrument on Deutsche's balance sheet using the US dollar/euro exchange rate at the time of issuance. Redeeming it would therefore result in an FX loss calculated by analysts to be more than €200m. Deutsche will also incur an FX loss due to the upcoming redemption of the US$1.5bn 7.5% AT1, but that loss is expected to be smaller.
Other bankers stressed that the latest Deutsche case is not comparable to previous non-call decisions from banks driven by the cost of refinancing a call with a new instrument. Based on current rates, the US dollar bond's 4.789% coupon is set to reset to around 8.5%. The bond traded up following the non-call announcement, with its cash price rising from 99.5 on Friday morning to 100 by Friday's close.
"Tier 1 investors should be absolutely fine with getting extended in that situation," said a second syndicate banker.
However, more broadly, Deutsche's track record on call decisions – the bank was also the first major European bank to skip the call of a Tier 2 bond in 2008 – is cited by market participants as being one of the factors behind the pickup the bank offers to peers in the AT1 market.
One fund manager said the FX loss factor makes last week's non-call decision "idiosyncratic," but said that "other banks, notably the UK banks, have taken decent FX losses in the past when refinancing – hence this reflects DB’s less bondholder-friendly approach".
"Looking at where DB trades in AT1 versus Commerzbank, there is quite a wide spread differential. The market definitely penalises DB for higher extension risk."
Commerzbank's last euro AT1, for example, is a €750m 7.875% perpetual reset April 2032 note priced in June 2024 that was bid at a yield to call of 6.05% on Monday, according to Tradeweb figures.
Deutsche's last AT1 was a €1.5bn 7.375% perpetual reset April 2032 note priced in November that was on Monday bid at 6.88%.
For further comparison, all of the other euro benchmark AT1s issued so far this year have been priced between 5.625% and 6.25%.
The deal was ultimately priced with a reset spread of 460bp.