Deutsche Bank broke an unspoken rule of the capital market at the end of last year when it failed to call a €1 billion 3.875% 2004/2014 lower tier 2 issue at the first opportunity.
"We decided not to exercise the early redemption option because the replacement costs would be more expensive than the existing coupon of Euribor plus 88 basis points," says Ron Weichert, a Deutsche Bank spokesman.
The vast majority of hybrid debt – both tier 1 and tier 2 capital – sold to institutional investors has a call date some five years or more earlier than the scheduled maturity. But in a wide-credit-spread environment the economic incentive to call – normally an increase in the coupon of an additional 50bp plus the prevailing level of Euribor – is not particularly strong.
"We think that taking into account the various important constituencies, this makes a lot of sense," says Weichert. Given the scrutiny of, and injections of public capital into, financial institutions it could be increasingly difficult for bank chief executives to reject immediate shareholder concern on the basis that it is imperative to protect investors.
Just a few days before the Deutsche decision, Calyon reopened the sterling lower tier 2 market with a £250 million ($386 million) deal and paid Euribor plus 330bp for the privilege.