Mr. Dependable

IFR FIG 2010
5 min read

Rabobank has enjoyed another successful year as an issuer. It priced large conventional benchmarks throughout the year, added to its reputation as an innovator with an unprecedented contingent capital structure and explored the ultra long end where other borrowers fear to tread. Matthew Attwood reports.

In what has almost become a tradition for Rabo in recent years, the bank began the year with a blowout 10-year deal of €3.5bn. It was the first of a diverse range of transactions across currencies, maturities and formats. The bank’s approach to the market is predictable in that it funds through the cycle, has a very liquid curve and prides itself on working with investors. “Deal performance is massively important to us and we provide liquidity in our own paper like no-one else,” said Michael Gower, Rabo’s head of long-term funding. “We’re in front of people all the time so people feel they have direct contact and access.”

The bank’s investor-friendly approach means it is willing to offer assets to the market outside the comfort zone of most issuers, as evidenced by the 15-year euro and 50-year sterling transactions it brought in July. “There are times when investors want specific assets and we try and help them out on that,” said Gower. “Does Rabo require 50-year fixed-rate sterling funding? No. But there is huge demand in the UK for super-long assets and we feel duty-bound to provide that given the relationship we have with these accounts.”

The bid for high quality paper in the face of the sovereign crisis has benefited the Triple A rated issuer throughout the year. Traditional buyers of agency paper have returned, after withdrawing from Rabo in 2007, despite its rating, because of the general squeamishness about banks. While those conservative investors have returned, Rabo has not lost the support of the credit investors who became involved after spreads blew out.

A highlight for Rabo this year – and for the market in general – was its contribution to the nascent contingent capital market, the Senior Contingent Notes transaction it launched in March. The 10-year deal of €1.25bn features a regulatory capital trigger which will be deployed in the unlikely event of Rabo’s equity capital ratio falling below 7%, whereupon the principal will be written down to 25% of par. The heavily over-subscribed deal almost inevitably attracted comparisons to the Lloyds deal the previous November. However, the Lloyds trade, a liability management exercise involving existing investors and a conversion to equity, was not a precedent in any way, said Gower.

The deal was not brought with any regulatory benefit in mind. The aim was not to generate capital immediately, which is why it came in senior format. “It’s a product hedging such remote tail risk that it’s almost impossible to conceive of it happening, although the trigger we set would have quite a high probability of being set off by some banks,” said Gower. For that reason, some in the market have said that the deal could not be replicated by other issuers lacking Rabo’s reputation. But for most credit investors the promise of an immediate payment of 25% of principal – admittedly a bruising write-down - is a more acceptable outcome than conversion into equity. Consequently many bankers favour the SCN as a model for future issuance.

There was some confusion about the deal. One investor expressed a preference for Tier 1 because of the potential upside, even though a breach of the trigger would probably spell liquidation for the bank. “People who bought the trade understood that the probability of the trigger being breached was so close to zero that it would probably lead to bankruptcy, so they were taking on the same risk as senior paper,” said Gower. “Theoretically they got free money.”

The SCN was an exciting interlude but Rabo’s ability to bring innovative deals is tempered by a consistent approach to the global markets it serves. It has a consistent record in borrowing through the cycle which, according to Gower, has proved a comfort to investors in difficult times. He mentioned one investor at the height of the crisis holding large amounts of Rabo paper who could scarcely find a bid for government bonds but found Rabo willing to take on its own paper.

“Could you argue that we could price deals a basis point tighter sometimes? Sure. Could we save a few euros by refusing to buy things back? We could. But our approach has been justified – it’s how we continue to take liquidity out of the market predictably.”