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Capital: Rabobank brings contingent to new-issue market

Regulators will be delighted to see debt investors accept capital risk; Other bank issuers remain unconvinced

Rabobank took a bold step last month, selling a €1.25 billion senior unsecured 10-year bond that brings contingent capital to the new-issue market for the first time. This deal is a big step beyond the Lloyds Banking Group contingent convertibles last November, which arose from an exchange of existing liabilities into instruments that might convert into equity.

For four months, no bank followed Lloyds.

Now Rabobank brings the concept to the primary market for the first time. Credit buyers know the risk they are taking from the outset and were closely involved in establishing the price for taking it. As Rabobank does not have publicly traded equity, there is no dressing this risk up as an exchange in extremis into an equity option with potential upside.

"Rabobank has about €35 billion of equity. It would have to lose about €15 billion of it. Our mortgage loan book would have to be catastrophically hit"

Michael Gower, Rabobank

If Rabobank should be so badly damaged by losses on bad loans that its equity capital ratio falls from its present 12.5% to 7%, bondholders will suffer a 75% loss of principal.

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