Deutsche Bank Sells Dollar AT1 in Credit-Market Breakthrough

(Bloomberg) -- Deutsche Bank AG sold its first Additional Tier 1 bond since 2014 after drawing a flood of orders, as signs of progress in a turnaround bolster the appeal of the high-coupon notes.

The German lender priced the $1.25 billion perpetual note at 6%, versus an initial price target of about 6.75%, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The bonds, callable in October 2025, have an expected B1 rating at Moody’s Investors Service, or four steps below investment grade.

The bank received as much as $14 billion of orders for the notes, the riskiest type of bank debt, as Chief Executive Officer Christian Sewing starts to regain investor confidence by scaling back global expansion in a bid to end losses. The high demand and a price rise in secondary-market trading also reflect bond buyers’ willingness to buy into lower-rated deals amid wafer-thin global yields.

The sale would have been “unthinkable” even just a few months ago, CreditSights analyst Simon Adamson wrote in a note Tuesday. A combination of favorable market conditions and improving sentiment toward Deutsche Bank has “changed the landscape,” he wrote.

U.S. fund manager Capital Group also unveiled a stake in the lender last week, sending the bank’s shares rocketing. Deutsche Bank has cut costs and boosted capital buffers as Sewing pares unprofitable operations, sheds staff and refocuses more on Germany and Europe.

Firing line

Additional Tier 1 bonds are the first type of bank debt to take losses in a crisis. Industrywide, the notes have returned almost 5% already this year, based on a mixed-currency Bloomberg Barclays index, due to the lure of high coupons in a low-yield environment.

The 6% yield on Deutsche Bank’s new AT1 compares with an average yield of 2.57% on U.S. high-grade corporate bonds and an average yield of about 4% for dollar AT1s, based on Bloomberg Barclays data. The new note traded at 100.5 cents, according to Trace pricing.

“Investors don’t have to like the credit to buy this bond,” said Jakub Lichwa, a strategist at Royal Bank of Canada. “The current environment is highly supportive for bank debt.”

Deutsche Bank’s outstanding $1.25 billion 6.25% AT1 has also climbed to near par on speculation the note will be redeemed following the new issuance. The old bond was as low as 91 cents as recently as last month on concerns that the bank would skip the first call date in April.

Treasurer Dixit Joshi said Feb. 3 that analysts “should not draw any conclusion” about the bank’s plans to redeem old AT1s based on issuance plans.

The bank isn’t obliged to call the old 6.25% AT1 in April. It could instead leave the bond outstanding and potentially redeem some legacy debt that is losing value as regulatory capital, according to Steve Hussey, head of financial institutions credit research at AllianceBernstein Holding LP.

Deutsche Bank confirmed the AT1 sale in a statement. It acted as sole bookrunner on the deal.

To contact the reporters on this story: Alice Gledhill in London at agledhill@bloomberg.net;Steven Arons in Frankfurt at sarons@bloomberg.net

To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Neil Denslow, Dale Crofts

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