Deutsche Bank’s decision to skip an opportunity to redeem €1-billion of subordinated bonds at the first scheduled call date because replacing them would be more expensive has rattled the bond market. Some suggested the European investment bank’s move, which surprised both investors and experts, has transformed the subordinated debt market. They fear that other banks will follow, which could threaten their relationships with investors and trigger losses.
…
Deutsche Bank is the first major bank not to call a Lower Tier 2 issue, which rank just below senior bonds. The move has implications for the wider subordinated debt market was well as for extension risk of Tier 1 securities, Mr. Adamson. said.
I, for one, am very happy with this move. As I wrote in A Vale of Tiers:
Investors tend to trade sub-debt as if it will definitely mature on their step-up date – dealer quotations will often reflect a spread to a Canada bond maturing on the step-up date. However, while one may count on them being called, as expected in good times, this will not necessarily be the case in times of trouble. In times of trouble, three-month BAs + 100bp might look awfully skimpy! Investors should tread very carefully when purchasing debt of this nature.
For years, pseudo-managers have been able to outperform actual bonds simply by purchasing sub-debt and Innovative Tier 1 Capital, justifying these moves on the grounds that the tiered structures are included in the Scotia (now DEX) index. The largest corporate holding in XBB, for instance, is RBC Trust Subordinated Notes, with a pretend-maturity of 2012-4-30.
Sub-Debt has been discussed on PrefBlog, particularly in the posts Cracks Appear in European Sub-Debt Market and Banks and Subordinated Debt.
This is what the new BMO Capital Trust 10.22% notes are no?
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This is what the new BMO Capital Trust 10.22% notes are no?
Close. The BMO Capital Trust II issue is Tier 1 capital, so it’s easier to suspend the income payments and it ranks junior to sub-debt.
In broad principle, however, you’re quite right. The BMO notes will trade with a pretend-maturity of 2013-12-31, with a step-up to 5-Year-Canadas +1050bp on that date.
Close. The BMO Capital Trust II issue is Tier 1 capital, so it’s easier to suspend the income payments and it ranks junior to sub-debt.
Are they considered Tier 1 because of the rule change? Does the same order apply? i.e. As with Boats, Bats, Cats, Trucs, you receive semi-annual interest payments ONLY if the preferred shareholders get theirs or do these get you in line ahead of preferreds?
Are they considered Tier 1 because of the rule change?
Yes. The 99-year maturity and the cumulative dividends allows them to be considered a bond (with tax deductible interest) by the tax man; prior to the rule change these features would have disallowed its inclusion in Tier 1.
As with Boats, Bats, Cats, Trucs, you receive semi-annual interest payments ONLY if the preferred shareholders get theirs or do these get you in line ahead of preferreds?
As far as I know, all the BOATS, BATS etc. are senior to preferreds.
From
http://www2.bmo.com/ar2006/downloads/bmo_ar06_note18.pdf
“Holders of the BOaTS are entitled to receive semi-annual non
cumulative fixed cash distributions as long as the Bank declares
dividends on its preferred shares, or if no such shares are outstand
ing, on its common shares in accordance with ordinary Bank
dividend practice.”
I don’t know but could one read this as subordinate to preferreds or on par with preferreds or, should theren’t be any preferreds equal to the common? It doesn’t seem to read to be senior to either?
From the BMO Capital Trust Prospectus dated September 29, 2000:
The Accumulated Unpaid Indicated Distribution (AUID) must be paid to the holder if the bank blocks conversion into Preferred Shares, which are soft-retractible:
If the BOaTS don’t get their distribution on any date, dividends on preferreds and common are stopped until after the next distribtion date. Thus, resumption of BOaTS distributions will occur prior to resumption of preferred dividends.
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