FRANKFURT: A Deutsche Bank AG Additional Tier-1 (AT1) bond has set a three-year high when the bank decided not to redeem the debt, offering a coupon that is almost twice as much. It is a rather infrequent practice to decline a call and investors are generally not very happy about it, but this time the funds were very much willing to take the notes as the coupon is likely to reach approximately 8.47%. This sent prices of the bonds—currently bearing a yield of 4.789%—to their highest level since November 2021, according to last Friday’s quotes. Marek Ozana, a portfolio manager at SEB Asset Management, commented: “We have been supporting Deutsche Bank’s transformation for a long time and if the bank keeps on improving, we consider the bond’s coupon of more than 8.4% as a good investment. ” AT1 bonds are designed as perpetual instruments and are usually redeemed at the first call date. However, missing a call can create some concerns about extension risk, but investors weren’t fazed this time, after being tipped by market analysts in 2025.
The decision of the bank was based on the fact that it did not want to lose €240 million (US$260 million) for a worse euro rate if it had called in the $1.25 billion debt, according to Simon Adamson of CreditSights. According to a statement, Deutsche Bank said that it is adopting a ‘case by case’ approach in its response to a question on whether it plans to exit AT1s, and a spokesperson for the bank declined to comment on the analyst’s estimates. “German banks treat AT1s as equity, fixing the exchange rate at issuance. That’s where the forex losses kick in,” he added. The euro has recently traded at $1.08, and the currency has depreciated by 35 percent over the last 10 years from its value of $1.37 when the bond was issued in 2014. The AT1 terms provide for a coupon reset at the call dates and with the base rates being much higher today than they were in 2020, the increase was facilitated. This is according to Jeroen Julius of Bloomberg Intelligence, who said this is a very rare’ case of a major European bank AT1 skipping two consecutive call dates — the last one was in 2020, and the next one isn’t due until 2030. Of the eight large European AT1s that skipped their first call, five, including this one, remain outstanding, he said. In the meantime, Deutsche Bank is preparing to call a different US$1.5 billion AT1 bond with a 7.5% coupon on April 30, but Adamson estimates that this could result in forex losses of about €180 million. — Bloomberg.
