The split that formed DEPFA Bank also halved its capital base. It turned to the hybrid capital market in the search for new opportunities, hiring ABN AMRO to joint-lead manage a E300m deal that demonstrated a groundswell of retail demand.

By the mid-1990s, it was clear that the framework of the German Mortgage Bank Act had become too restrictive for the ongoing development of DEPFA’s public finance and property activities. A proposal was tabled in 2001 to split the group into two specialist banks, a public finance bank headquartered in Dublin (DEPFA Bank) and Aareal Bank, a German-based property bank. DEPFA Bank is today a leading global provider of financial services to public sector clients, from budget-related financing to the funding of infrastructure projects and investment banking solutions for public sector authorities.

Targeting performance

DEPFA Bank’s managing director of group strategy, Matthias Achilles, says that the split provided part of the rationale that led the bank to access the hybrid capital market. “At a stroke of the pen, each bank lost half its capital base. That was when we started looking at hybrid capital on a regular basis to see if we could identify market opportunities. We are interested in good and consistent performance so, in the end, we decided to tap the European retail investor market. Only retail investors will buy genuinely perpetual instruments, and our interest was to structure something as close as possible to equity.”

A few months ago, DEPFA appointed ABN AMRO to joint-lead manage its E300m 6.5% perpetual non-call five-year preferred securities – DEPFA Funding II LP (rated A2 by Moody’s and A by S&P, two notches below the senior unsecured ratings of the parent). The deal was launched while the Central Bank of Ireland (CBI) was conducting a review of allowable capital instruments, including the classification of innovative or non-innovative (deals carrying the innovative tag are limited to 15% of total Tier 1). The deal was issued indirectly, which may confine it to the 15% bucket, depending on the outcome of the CBI review. To address the uncertainty surrounding the rule in Ireland, the structure includes a unique option enabling the issuer to ‘flip’ the securities into a direct equivalent without penalty.

“The final structure gave the issuer a great deal of flexibility given the uncertainty,” says Ronan Donohue, director covering regulatory capital in ABN AMRO’s Financial Markets Advisory group.

The issue was pre-marketed with a maximum deal size of E300m and a coupon guidance of “low-to-mid 6%”. The book built up solidly and was over-subscribed after a nine-day subscription period with Dutch retail investors. As the market had sold off significantly during the final days of the subscription period, the coupon was fixed at 6.5%.

Retail investor demand clearly drove the deal, including demand from accounts in the Netherlands, Germany, Switzerland and Monaco. ABN AMRO’s European retail network provided orders of more than E100m. Institutional accounts from Germany, Ireland, UK and Greece also participated.

Mr Donohue says that the ongoing deliberations over the Basel II Accord have focused attention on capital management so that, indirectly, every trade going through is executed with the proposed capital adequacy regulations in mind. “Clients certainly consider the possible implications of Basel II in considering their overall funding and capital strategies,” he says.

Tighter spreads

“The market for the spectrum of hybrid capital instruments has continued to grow and evolve despite the various shocks to the financial system that have directly or indirectly affected the banking industry in the past few years. It has been a difficult time for hybrid issuance, yet we have been seeing tighter spreads on average for Tier 1 and Upper Tier 2 transactions as the credit market continues to improve,” he says.

ABN AMRO was at the forefront of the market with two deals for its own account in 2003 (ABN AMRO Capital Funding Trust V & VI). The $1.3bn Trust V transaction was unique in that it targeted the global retail investor market, with some 50% of the issue placed outside the US. “This demonstrated the groundswell of retail demand for hybrid issuance,” says Mr Donohue.

“We saw 2003 volumes for Tier 1 hybrid capital issuance surpass those of 2002, and we expect volumes for next year to be at least on par with 2003. We are looking at global recovery and, if you look at how hybrid issuance bounced back after the turbulent events of the last couple of years, we’re quite positive in our outlook. The hybrid market is nothing if not resilient and an increasingly important part of global capital markets.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter