Deutsche Bank AG is selling 15 million euros ($19 million) of credit-linked notes based on the creditworthiness of La Caixa, Spain’s biggest savings bank.
The five-year notes use credit-default swaps to link to the performance of Barcelona-based La Caixa’s debt. Investors get income generated from the swaps in exchange for taking on the risk of losses on their principal if the lender defaults during the life of the securities.
The notes pay annual interest of 2 percentage points more than the three-month euro interbank offered rate, or Euribor, with a minimum coupon of 4.5 percent, according to the term sheet. The securities will be issued July 28.
The cost of insuring Spanish bank debt against default surged this year as bondholders speculated the country wouldn’t be able to cut its deficit without hurting the economy. Credit-default swaps on La Caixa’s subordinated debt have more than doubled to 340 basis points this year, according to data provider CMA.
The notes are priced at 100 percent of face value and sold mainly to institutional investors in Spain, according to Michael Daub, a credit-linked note trader at Deutsche Bank who worked on the deal. Three-month Euribor, an average of rates set daily by banks and used as a borrowing benchmark, is 0.881 percent.
Credit-default swaps are used to speculate on or hedge against a company’s ability to repay debt. An increase indicates deterioration in the perception of credit quality. A basis point on a contract protecting 10 million euros ($12.8 million) of debt from default for five years is equivalent to 1,000 euros a year.