(Corrects description of bonds as senior securities in story published Jan. 17.)
The perpetual Tier 1 notes in dollars, which can be repaid after 5 1/2 years, lose money if Rabobank’s consolidated equity capital ratio falls below 8 percent, according to Rogier Everwijn, the Utrecht, Holland-based lender’s head of long-term funding. The company last year issued 1.25 billion euros ($1.66 billion) of 6.875 percent senior notes due 2020 that can be written down by 75 percent and repaid immediately in a crisis.
Rabobank is selling debt securities that have tax advantages over equity, as well as loss-absorbing features that allow the issuer to treat them as capital. Regulators are pushing banks to issue this type of debt after existing so- called hybrid bonds failed to absorb losses during the 2008 financial crisis.
The bank, which has the top credit ratings from Moody’s Investors Service and Standard & Poor’s, had a Tier 1 ratio of 13.5 percent as of June last year and would have to lose 12.3 billion euros to trigger the writedown, according to Everwijn. The securities are written down rather than converting to equity because Rabobank doesn’t have publicly traded stock, he said.
The securities, which can be written down more than once, can’t be written up. Interest payments are optional and don’t accumulate and the bank isn’t allowed to make them if it doesn’t have the money, if regulators veto payment on its other securities, or if it breaches capital requirements.
Bank of America Corp., Credit Suisse Group AG, Morgan Stanley and Rabobank are managing the sale of the notes, the people said.
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