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Deals of the year 2010: Rabobank €1.25 billion contingent capital notes

In the past couple of years stiffer capital adequacy rules were agreed on as part of Basle III. While the spirit of the accord was about a greater emphasis on pure equity making up most of a capital buffer, there was much discussion about creating forms of debt that were loss absorbing in times of distress. In late 2009, contingent capital, popularly referred to as CoCos, first appeared, when Lloyds Banking Group exchanged existing hybrid debt with these new securities. These instruments came with an explicit trigger where the debt would convert into equity when Lloyds’s tier-1 ratio fell below 5%. Rabobank’s March €1.25 billion 10-year transaction, lead managed by itself, Credit Suisse and Morgan Stanley, was the inaugural primary contingent capital issue.

Size: €1.25 billion contingent capital notes
Date: March 12
Leads: Credit Suisse, BAML, Morgan Stanley, UBS, Rabobank
Coupon: 6.875%

Because Rabobank is a member-owned cooperative, the issue couldn’t be converted into conventional equity. Instead, if its tier-1 ratio fell below a 7% trigger, the debt would be written down by 75%, while the bank would pay off the remaining 25% in cash to the investors. Rabo began discussions in late 2009 to develop the structure, and in early 2010 started soft sounding investors. It found a receptive investor base for its structure, although pricing was less certain. After roadshowing the deal to more than 200 investors, the deal priced at a yield of 6.875%, near the top end of the original soft-sounding price of between 6% and 7%, and with an order book totalling 181 investors, predominantly from the UK. "I’m absolutely convinced that contingent capital is an instrument that can be used by all banks, a new suite in the overall capital framework of all banks," says Bert Bruggink, Rabobank’s chief financial officer.