Reuters: Bankruptcy News: Rabobank nears capital target with Tier 2 bond

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Rabobank nears capital target with Tier 2 bond Jul 19th 2013, 17:01 Fri Jul 19, 2013 1:01pm EDT * Dutch lender adds 20bp to 2016 capital ambitions * Bank eyes second Tier 2 before year-end By Aimee Donnellan LONDON, July 19 (IFR) - Dutch lender Rabobank moved within inches of hitting its total capital target this week with a EUR1bn 10-year Tier 2 bond that will provide an extra layer of protection for senior bondholders from bail-in regulations. The bullet transaction, from one of the best capitalised banks in Europe, added some further 20bp to its total capital ratio, which already stood at 19% at the end of 2012. Rabobank, rated Aa2/AA-/AA at the senior level, has already made it very clear it intends to boost that to a minimum of 20% by 2016 by issuing mainly Tier 2 securities in an effort to mitigate the risk of haircuts on senior bondholders. By bringing the deal this week, the issuer was able to get in ahead of a number of other banks also looking to raise capital and to leave itself with the option of yet another Tier 2 before the end of the year. "Improved overall market conditions and positive supply/demand dynamics provided for a favourable backdrop for Rabobank to issue a new benchmark Tier 2 transaction ahead of the summer holiday period and expected September supply," said Rogier Everwijn, director of long-term funding at Rabobank. "This deal has improved our capital position and has got us closer to our targets for 2016." Over the past year, banks' focus on total capital has intensified amid increased regulatory power to impose losses on bondholders in the event of a bank failure. One of the key elements of the Crisis Management Directive is the introduction of the bail-in tool for senior debt. Although that is not expected to be implemented until 2018, regulators in Germany and the Netherlands, for example, have been pushing for it to be brought forward to 2015. The Dutch have been particularly aggressive, shocking the market by wiping out junior bondholders in the nationalisation of SNS Reaal in early February, making it even more imperative for Rabobank to set itself apart from its country peers. MOST EFFECTIVE The Netherlands is still awaiting clarity on the tax treatment of Tier 1, which explains why Rabo has been so focused on building up its Tier 2 buffers. Tier 2 is also the cheapest form of subordinated bank debt, sitting above Additional Tier 1 and equity in the capital structure. "This is a straightforward vanilla Tier 2 transaction that will help Rabobank build up its total capital in the most cost-effective way," said Daniel Bell, head of EMEA DCM capital products at Bank of America Merrill Lynch. Rabo opened books on its first euro subordinated deal of 2013 on Wednesday morning at mid-swaps plus 210bp area via Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley, Nomura and Rabobank. It later priced the transaction in line with guidance at mid-swaps plus 210bp on a book that topped EUR1.25bn. To calculate relative value, syndicate bankers looked to Rabo's outstanding curve for guidance on pricing, which included a September 2022 Tier 2 bond bid at 180bp over mid-swaps pre-announcement, a November 2020 bid at 165bp and a May 2019 bid at 155bp. Fair value was calculated at around 190bp, which implied a new issue premium of around 20bp. Rabobank has been absent from the euro subordinated sector since September last year, when it sold the EUR1bn September 2022 deal mentioned above, in conjunction with a GBP500m 15-year. That dual-tranche offering attracted more than EUR3.6bn of total demand, with the bonds pricing at mid-swaps plus 245bp and Gilts plus 305bp, respectively. QUESTIONABLE TIMING Although the latest deal was comfortably covered, market observers queried the timing, which follows weeks of intense volatility. Spreads have stabilised over the last two weeks, but the cost of insuring subordinated debt has bounced around dramatically over the past few months. The iTraxx Sub index hit a wide of 320bp after Cyprus was bailed out at the end of March and then recovered to 170bp on May 22 before Bernanke indicated that QE might be tapered. One banker argued that Rabo should have come earlier in the year, when it would have arguably been able to find larger demand and cheaper pricing. One pointed out that Rabobank is one of the only issuers in Europe that has near constant access to the market. "I think it's likely that Rabobank got a tap on the shoulder from its regulator about shoring up capital because the timing just doesn't make sense," said a treasurer at a rival bank. However, Rabobank was quick to quash these rumours and said that it had always been planning to issue a Tier 2 deal in the second half of the year and decided to beat the September rush by coming this week. In addition, its extremely strong capital position would have made such a reason for issuance unlikely. (Reporting by Aimee Donnellan; Editing by Natalie Harrison and Philip Wright) Link this Share this Digg this Email Reprints

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