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Deutsche Bank Increases Capital Notes Sale to $4.75 Billion

Deutsche Bank AG (DBK) increased its sale of subordinated notes to $4.75 billion as Germany’s biggest lender seeks to bolster capital ratios.

The Frankfurt-based bank initially marketed about $4 billion of additional Tier 1 bonds in dollars, euros and pounds that it can buy back after six, eight and 12 years, a person familiar with the transaction said. Investors placed more than 25 billion euros of orders for the deal at the prices offered, according to Group Treasurer Alexander von zur Muehlen.

Sales of bonds that can be written off or converted to shares in a crisis are increasing as lenders comply with new capital regulations designed to ensure investors meet the costs of bailing out a troubled bank rather than taxpayers. Issuers can’t default on additional Tier 1 notes because they are undated and interest payments are optional, which means they can continue operating without government support.

“Deutsche Bank is a first-time issuer and it doesn’t have that much outstanding in subordinated bonds,” said Daniel Bjork, a fund manager at Swisscanto Asset Management in Zurich, which has more than $56 billion of assets. “People have room for the name. Also, first-time issuers have tended to perform well.”

Deutsche Bank is selling $1.25 billion of additional Tier 1 bonds that will be priced to yield 6.25 percent, 1.75 billion euros ($2.4 billion) to yield 6 percent, and 650 million pounds ($1.1 billion) paying 7.125 percent. The average yield on speculative-grade contingent capital bonds is 6.31 percent to their first call date, Bank of America Merrill Lynch index data show.

‘Strong Demand’

The deal will add to more than $40 billion of issuance by European lenders since the market opened a year ago, with coupons at an average 7.49 percent, according to data compiled by Bloomberg.

“We tried to price fairly,” von zur Muehlen said in a telephone interview. “Demand was extraordinarily strong. It was well-split geographically and well-diversified in style, with a lot of real-money, high-quality accounts involved.”

Deutsche Bank’s additional Tier 1 bonds will suffer a temporary writedown if the bank’s capital falls below 5.125 percent of assets weighted by risk. The notes are expected to be rated two levels below investment grade at BB by Standard & Poor’s, and one step lower at Ba3 by Moody’s Investors Service.

“People tend to see Deutsche Bank as a general proxy for German bank risk,” said Steve Hussey, an analyst at AllianceBernstein Ltd. in London, which manages about $445 billion. “Its debt is probably a bit more expensive than it should be as a result.”

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, Tom Freke

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