Deutsche Bank Sells Subordinated Notes Tied to Credit Agricole

Deutsche Bank AG is among banks increasing sales of structured notes comprised of subordinated financial bonds as investors take on more risk to boost returns.

Germany’s biggest lender sold $2.5 million of five-year junior notes tied to the debt of Credit Agricole SA, its third such offering this year, according to data compiled by Bloomberg. The Frankfurt-based bank offered the securities as issuance of subordinated structured notes rose to $22.4 million in July, the most for any month since January 2012.

Structured notes package derivatives with debt, typically senior bank bonds, to offer customized bets to investors who are also exposed to the credit risk of the issuer. By selecting a bond lower down the capital structure, banks can create securities with higher potential returns.

“By taking on more credit risk, investors can receive coupons on subordinated bonds that can be noticeably higher than on the senior unsecured bonds usually used in structured products,” said Adrian Neave, the London-based managing director at Gilliat Financial Solutions, a unit of Arbuthnot Banking Group Plc that designs structured products.

Deutsche Bank raised $18 million from subordinated notes this year, Bloomberg data show. Nick Bone, a spokesman for the lender in London, declined to comment on the bank’s notes. The Portuguese unit of Banco Popular Espanol SA sold 15 million euros ($20 million) of subordinated interest rate-linked notes on July 30.

Credit Suisse

Credit Suisse Group AG is also marketing a callable credit-linked note tied to the subordinated debt of Standard Chartered Plc, according to an offer document for the security.

Gilliat is marketing its first structured notes based on subordinated debt which it plans to issue next month. The bank is using a subordinated bond issued by Commerzbank AG for its enhanced income builder notes, which will allow it to offer coupons that are about two percentage points higher than if they were based on senior unsecured bonds, said Neave. The securities pay a maximum annual coupon of 8 percent, while investors can lose all of their investment, according to an offer document,

Issuers are struggling to create attractive terms on notes as central banks in Europe and the U.S. hold interest rates near zero, said Neave. When rates fall, the zero-coupon bonds used to create notes become more expensive, leaving the bank with less money to sweeten the terms by buying options.

The extra returns available from buying the notes of riskier issuers has fallen as credit-default swaps insuring the debt of European and U.S. banks remain at levels less than half of last year’s highs, said Neave.

By going down the capital structure banks can create notes with higher potential returns without sacrificing the creditworthiness of the issuer, he said.

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