FRANKFURT: A Deutsche Bank AG Additional Tier-1 (AT1) bond has surged to the highest in three years after the lender decided against redeeming the debt, choosing instead to let the coupon nearly double.
Skipping a call is an unusual step and traditionally frowned upon by investors, though in this case funds snapped up the debt given the coupon is set to jump to around 8.47%.
That drove up prices for the notes, currently paying a 4.789% coupon, to be quoted last Friday at the highest since November 2021.
“We have been supportive of Deutsche Bank’s improvement story over the years, and assuming Deutsche Bank continues its progress, we believe that the bond with a coupon above 8.4% is attractive,” said Marek Ozana, a portfolio manager at SEB Asset Management.
AT1 bonds , designed as perpetual securities, are typically called at the first opportunity.
While skipping a call can lead to worries about so-called extension risk, in this case investors had been prepared after market analysts flagged the possibility this year.
The decision was due to the bank standing to lose around €240mil (US$260mil) if it redeemed the debt because of a weaker euro, according to CreditSights’ Simon Adamson. The Frankfurt-based lender cited its strategy of “taking a case-by-case approach” in its decision not to exercise the call option for the US$1.25bil of debt, according to a statement.
Furthermore, a bank representative declined to comment on the analyst estimates.
“The foreign exchange losses arise because German banks account for AT1s as equity, using the exchange rate at the time of issuance,” said Adamson in a note to investors last Friday.
The euro is currently at US$1.08, down from about US$1.37 when the bond was issued in 2014, after a decade-long rally in the dollar.
AT1 securities are worded in such a way that the coupon changes when it hits a call date.
In this case, underlying interest rates are significantly higher now than when the coupon was last set in 2020.
The decision is a “very rare” instance of a large AT1 from a European bank that hasn’t been called on two consecutive call dates, said Bloomberg Intelligence analyst Jeroen Julius.
The notes also weren’t called in 2020, and the next option to do so is in 2030, Bloomberg data showed.
A total of eight large AT1s from European banks haven’t been called at the first option date, of which five remain outstanding, Julius added.
Deutsche Bank said it would redeem a separate AT1 bond of US$1.5bil of 7.5% notes on April 30.
On that note, the bank will face losses related to foreign exchange that could be in the order of €180mil, according to Adamson’s estimates. — Bloomberg
