Rabobank has announced that it:
successfully issued a EUR 1.25 billion, benchmark 10 year fixed rate Senior Contingent Note (“SCN”) issue, priced at an annual coupon of 6.875%, reflective of a premium to Rabobank subordinated debt paper, as well as a meaningful discount to where we believe Rabobank would be able to complete a hybrid Tier 1 offering.
The transaction enables Rabobank to further enhance the Bank’s creditworthiness, as the offering is designed to ensure that Rabobank’s Core Capital is strengthened in the very unlikely event that the Bank’s Equity Ratio were to fall below 7%. Rabobank has always been amongst the most conservative banks in the world, and this transaction, which effectively hedges tail risk, once again demonstrates the bank’s unwavering commitment to prudence. Finally, the offering anticipates on future (expected) regulatory requirements which are widely expected to be introduced in the near future, and to recognize the value of contingent buffers of capital.Given the novelty of the transaction structure, an interactive and highly intensive execution process was adopted, starting with the wall-crossing of a limited number of large credit buyers, in the days leading up to Rabobank’s annual results on March 4th, followed by a very intensive 4-day marketing effort across London, Paris and Frankfurt in the week of March 8th during which the product and the issuer’s credit were discussed with over 80 institutional investors.
Having garnered total orders in excess of EUR 2.6 billion, from more than 180 different accounts, it was decided to formally launch and price a more than twice oversubscribed EUR 1.25 billion offering on Friday March 12.
Rabobank has € 38.1-billion equity against € 233.4-billion Risk Weighted Assets, so I suspect that their current equity ratio is about 16.3%, although I cannot find a copy of the prospectus to nail down the definition. One source claims:
Lloyds’ deal, unlike the Rabobank structure, was to a large degree based on substituting existing subordinated debt for the new security. The “trigger”, the point at which the Lloyds debt would convert into equity in the bank, was set for when the bank’s core Tier 1 ratio fell below 5%. Rabobank, by contrast, has a trigger of 7% of its equity capital ratio, at which point the notes will be written down to 25% of their original value and paid off immediately.
However, converting the equity capital ratio, a much simpler measure of shares divided by debt, to a core Tier 1 trigger actually means the Rabobank trigger sits at about 5.5%. compared to Lloyds’, according to one banker on the deal.
Rabobank hired Bank of America Merrill Lynch, Credit Suisse Group AG, Morgan Stanley and UBS AG to organize presentations, according to Marc Tempelman, a managing director in Bank of America’s financial institutions group. The notes will be written down to 25 percent of face value and repaid if the bank’s capital as a percentage of assets is less than 7 percent.
…
Rabobank has 29.3 billion euros of equity capital, which it defines as member certificates and retained earnings, according to Tempelman. To trigger the contingent capital notes, capital levels would have to fall by 12.9 billion euros, he said.
This will take a while to think about.
There’s a degree of first loss protection, sure: if the bank loses less than € 12.9-billion, there’s no loss to noteholders. But then the loss gets triggered … equity holders (as defined) have lost 44% and this leads to a 75% loss for noteholders!
This isn’t a bond, it’s an insurance policy. And the presumption that the trigger is based on financial statements is a temptation for all kinds of jiggery pokery. AND in the event that the loss is triggered, there will be cash leaving the firm.
If anybody can find a prospectus, please let me know.
There is speculation that Royal Bank of Scotland is mulling over issuance of a similar structure.
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