* Deutsche reenters sub and US dollar markets after AT1 meltdown * Bank pays up to appease investors By Alice Gledhill and Will Caiger-Smith LONDON, May 13 (IFR) - Deutsche Bank this week proved to the world it had access to two key funding markets, although the eye-watering spreads it had to pay suggest the bank has not fully regained the confidence of investors. A 750m 4.5% 10-year Tier 2 bullet issue was a huge step forward for a bank, whose Additional Tier 1 securities led a savage sell-off in bank capital bonds earlier this year. The deal was priced just three days after a US$3.6bn senior trade demonstrated the bank’s access to the world’s deepest bond market. Many market participants viewed the Tier 2 trade as a stepping stone in Deutsche’s eventual return to the Additional Tier 1 market, even though a comeback is still likely to be some way off. Both trades came at a high price for the bank, however, highlighting the toll that recent volatility has taken on its funding costs as it struggles through an epic restructuring. The Tier 2 bond (rated Ba1/BB+/BBB+) offering was the most expensive ever issued by the bank in euros on a spread basis, at 400bp over mid-swaps. This was almost double what it paid for its last euro Tier 2 sale early last year and not far from the 469.8bp equivalent spread it paid for a 1.75bn Additional Tier 1 in 2014, callable in April 2022. It was also 60bp wider than where German peer Commerzbank issued a 1bn 10-year Tier 2 bullet (rated Ba1/BBB-/BBB) in March. “They’re a bit like ships passing in the night, and have converged and diverged in the last six to nine months,” said Robert Montague, senior investment analyst at ECM Asset Management. But solid execution and a strong performance trumped the need to shave off every last basis point. “The deal was more about demonstrating market access than a compelling need for Tier 2 capital. It was part of the overall strategy to re-engage with our fixed-income investor base,” said Jonathan Blake, head of issuance at Deutsche. It drew 1.7bn in orders but leads did not tighten initial price talk of 400bp area. It was bid almost 4bp tighter on Friday according to Tradeweb. “It’s not as encouraging as I would have hoped given the generous absolute spread and coupon. But it’s a difficult story. They’ve done the right thing and didn’t try to oversize it or squeeze on price,” said a banker away from the deal. Deutsche has been gradually moving down the capital structure as it returns to the bond markets, initially testing the waters with euro covered and senior unsecured bonds in March. “Issuers, regardless of what the market has thrown at them, have to get on with getting their capital structures in shape,” said Roberto Henriques, European credit analyst at JP Morgan. The issuer also adopted a cautious strategy in the US dollar market, offering 40bp-50bp premiums across the deal’s three tranches in recognition of the trade’s importance - but repricing its curve in the process as investors switched out of old bonds into the new issue. Its outstanding 3.125% January 2021s pulled 25bp wider before tightening 3bp-4bp on Tuesday. Investors placed US$6.7bn of orders but some were still reluctant to take the plunge. Leads only pulled in pricing by 12.5bp from initial thoughts. “There is just not enough spread you could put on it for the uncertainty in the story,” said Bill Hines, investment-grade trader at Aberdeen Asset Management in New York. The three-year fixed and floating notes were priced respectively at Treasuries plus 200bp and Libor plus 191bp, while the fives came at Treasuries plus 225bp. The Baa1/BBB+/A- rated bonds were seen 12bp-13bp tighter the next day. Peter Diamond, Deutsche’s head of FIG flow for Western Europe, underlined the importance of re-establishing market access to meet the bank’s 35bn (US$39.8bn) yearly funding target. “We are on target, but you have to have access to all the markets to achieve that,” he said. Deutsche’s US dollar senior unsecured curve is now trading where it should be following February’s senior debt buyback, added Diamond. “The repricing is to us an unwind of the technicals that were inherent in those bonds,” he said. “It’s now a fairer reflection of the US market.” The bank does not need to raise further Tier 2 debt this year, according to a spokesman. CFO Marcus Schenck confirmed on a recent analyst call that AT1 securities remained part of the bank’s capital and funding toolkit despite CEO John Cryan publicly decrying them as a “bad product”. But the bank could “easily wait more than a year or so” before issuing, Schenck added. Deutsche was sole bookrunner on the Tier 2 trade, with Banca IMI, ING, Natixis and Standard Chartered as joint leads. Deutsche was sole lead on the US dollar senior transaction. (Reporting by Alice Gledhill, Will Caiger-Smith, additional reporting by Steve Slater, editing by Helene Durand, Matthew Davies)
Deutsche Bank has sought to appease investors by demonstrating its access to two key markets. A USD $3.6bn senior trade, followed by a 750m 4.5% 10-year Tier 2 bullet - the bank’s most costly issued in euros on a spread basis - and the latter is regarded by industry insiders as a way for Deutsche Bank to return to the Additional Tier 1 market. Jonathan Blake, head of issuance at Deutsche said the move was “part of the overall strategy to re-engage with our fixed-income investor base”.