Bonds Oversubscribed A Growing Appetite for Risk

Deutsche Bank’s credit rating is lower than it was in 2010. Yet its €1.25 billion bond sale yesterday drew a slew of buyers -- allowing it to sell more than planned. The sale signalled greater investor appetite for risk, even in times of record low returns.
Deutsche Bank is getting money served to it on a platter.


Cheap money is flooding Europe, and it’s not just governments that are benefitting.

Deutsche Bank, Germany’s largest bank, became the latest firm to take advantage of a massive appetite among investors for corporate bonds. Pension funds and insurance companies in particular are looking for any place to park their money that can still generate a semi-decent return amid record-low interest rates across the European continent.

Deutsche Bank on Monday sold €1.25 billion, or $1.42 billion, in so-called Tier-II bonds with a maturity of 10 years, a move that will help the bank meet new and tougher reserve requirements from financial regulators in Europe. It follows other moves in the last two years, including raising capital and issuing convertible bonds, which have helped the bank increase its reserves and put the bank in a more stable outlook.

According to financial sources, the bank had initially planned to sell about €1 billion in bonds, but demand for the Deutsche Bank’s debt was so high that the bank chose to take an extra €250 million. The bond was oversubscribed by a factor of 4 to 1, according to trading sources. The coupon for the bond was set at 2.75 percent.

The fact that Deutsche Bank could generate this kind of demand, even though the bank’s credit rating is lower now than the last time it issued similar bonds in 2010, reflects a growing risk appetite among investors in Europe over the last few years.

Analysts say investors are more willing to take risks now than they were only a few years ago, and are piling into corporate bonds in search of any investment that will still give them a solid interest rate. The European Central Bank, which has brought interest rates to a record low of 0.05 percent and in January launched a major €1.1 trillion bond-buying program, is helping this process along.

“The risk appetite is growing, also for lower ratings, because they can get something on top of them,” Monica Fernandez, who leads corporate bond research for German bank DZ Bank, told Handelsblatt Global Edition. ‘”The demand continues to be high, also because of the ECB’s measures….investors are left otherwise with very few alternatives.”

New emissions of euro-denominated corporate bonds reached a record €318 billion in 2014, beating a previous high reached in 2009, according to DZ Bank. This year is likely to be only slightly below that record total, the bank said.

The risk appetite is growing, also for lower ratings, because they can get something on top of them. Monica Fernandez, Corporate Bond research, DZ Bank

Demand for Deutsche Bank’s bonds came primarily from institutional investors, and especially out of Britain.

The bond issuing will help the bank prepare for new tough reserve requirements that are expected to be imposed by financial regulators, who have been increasingly targeting major global banks that could pose a threat to the entire financial system.

The reason for the higher demands stems from the financial crisis in 2008, when many financial firms in the United States and Europe had to be bailed out by taxpayers. To avoid this happening again, the world’s leading 20 industrial and developing nations have agreed to keep a close eye on 30 banks they believe could pose a systemic risk to the system. Deutsche Bank is included in the list.

The new funds raised by Deutsche Bank on Monday won’t affect the core ‘Tier-1’ equity capital ratio of Deutsche Bank – the tightest measure of a bank’s reserves – but they do affect a broader measure of reserves, including both Tier 1 and Tier 2 capital reserves, which is also being looked at by regulators.

Tier 2 bonds are considered a kind of lower-ranking, riskier debt, because investors will not have a first claim on assets if the bank goes bankrupt. Senior creditors will get first dibs. That makes them something more akin to equity capital and a target above all for professional investors.

Monday’s action brings Deutsche Bank’s “Total Loss Absorbing Capital” ratio up 30 basis points to 16.3 percent. That would put it just barely in line to meet the regulators’ likely new requirements. While many of the details have yet to be fixed, global regulators are widely expected to set this ratio at between 16 and 20 percent.


Peter Köhler leads banking coverage in Frankfurt for Handelsblatt. Christopher Cermak is an editor covering finance and economics for the Handelsblatt Global Edition in Berlin. To contact the authors: [email protected] and [email protected]