Deutsche Bank Said to Sell About $4 Billion of Capital Notes

Deutsche Bank AG (DBK) is marketing its inaugural issue of subordinated bonds designed to absorb losses while allowing a troubled lender to remain in business.

Europe’s biggest investment bank is selling about $4 billion of undated contingent capital notes in euros, dollars and pounds, according to a person familiar with the deal. It’s the first sale of additional Tier 1 bonds from a German lender since the market opened in April 2013.

Sales of bonds that can be written off or converted to shares in a crisis are rising as lenders move to comply with new European Union regulations that aim to pass a troubled bank’s bailout costs to investors rather than taxpayers. Issuers can’t default on additional Tier 1 notes because interest payments are optional, which means they can continue operating without government support.

“Everyone wants this sort of bond these days,” said Mark Holman, chief executive officer of TwentyFour Asset Management LLP in London, which oversees about $3.9 billion of fixed-income assets. “Deutsche Bank is the leading bank in Europe’s leading economy, it’s an inaugural deal and investors need new names. I would expect there to be a lot of demand.”

The popularity of riskier assets pushed average yields on high-yield contingent capital securities to a record low of 6.74 percent last week, according to Bank of America Merrill Lynch index data. The gauge has since climbed to 6.79 percent. That compares with average yields of 2.39 percent for bank bonds globally, the data show.

European Issuance

High-yield bonds are rated below BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service. S&P may rate Deutsche Bank’s additional Tier 1 notes at BB, two levels below investment grade, while Moody’s is expected to rank the debt one step lower at Ba3.

The deal will lift total issuance of additional Tier 1 bonds from European lenders to more than $40 billion, with almost $26 billion already issued this year, according to data compiled by Bloomberg.

The German lender will have the option of repaying the notes in dollars, euros and pounds after six, eight and 12 years respectively, according to the person familiar with the sale. The securities will suffer a temporary writedown if the bank’s capital falls below 5.125 percent of risk-weighted assets, Deutsche Bank said on its website.

The Frankfurt-based lender is also seeking to raise 8 billion euros in a share sale, with 1.75 billion euros already taken up by the Qatari royal family, it said in a statement last night. Deutsche Bank plans to raise the remaining 6.3 billion euros from a rights offer in June.

“The capital increase should have a positive impact on pricing,” Simon Atkinson, a London-based analyst at CreditSights Inc., said in a note today. “While Deutsche Bank has favored organic capital growth, regulators have been raising the bar.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Jennifer Joan Lee, Michael Shanahan

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