Rabobank plans hybrid bond

Rabobank is planning the first bond to comply with tough new global rules on what securities can count towards regulatory capital.

The Dutch mutual - the only private sector bank rated triple A - is currently marketing a deal for a hybrid where investors will lose all their money if the bank breaches pre-set capital ratios.

The deal comes just two days after the Basel Committee on Banking Supervision last week said that all hybrids must in future contain a mechanism for forcing investors to take losses at the point of that bank’s crisis, either by converting to equity or, as in the case of Rabobank’s deal, writing off the value of the deal.

Hybrids sit between equity and debt, and are cheaper than pure equity. European banks in particular increasingly turned to them before the crisis to top up their regulatory capital. However during the market turmoil, the bonds failed to absorb losses as regulators had expected.

Rabobank is expected to price its bond later this week. Although no size for the transaction has been given, the bank typically borrows at least €500m per bond deal.

Rabobank’s bond would be triggered if its consolidated equity capital ratio breached 8 per cent - defined as the bank’s retained earnings and membership certificates relative to its risk weighted assets. This is roughly equivalent to a core tier one ratio of 6.5 per cent for a listed bank.

The Dutch lender had a Tier 1 ratio of 13.5 percent in June last year.

Rabobank itself on being a market leader in terms of innovative issuance. Last year it issued bonds that do not have to be repaid for a century and more pertinently for its latest deal, a form of contingent capital where investors lose three quarters of their investment if the bank breaches pre-set ratios.

Then, it sold €1bn of the notes, with a coupon of 6.875 per cent, after receiving orders for €2.25bn. However those notes are senior debt unlike this offering, and it did not look for that deal to be counted towards its regulatory capital as this one will be.

Bank of America Merrill Lynch, Credit Suisse, Morgan Stanley and Rabobank are managing the deal.

Watchers said the deal could help re-open the market for hybrid debt, which has been virtually frozen since the crisis as bankers waited to see what new structures Basel might allow compared with existing deals.

Those now outlawed hybrids tended to have features that in theory punished issuers who didn’t repay the bond at the first available maturity - by charging more higher interest, for example - and allowed banks to stop paying interest in certain circumstances. But during the depths of the crisis very few banks proved willing to upset their powerful bond investors. Officials eventually forced state-supported banks to stop payments where possible.

Since late 2008, a series of banks have conducted so-called “liability management” exercises to take advantage of weak market prices by buying the bonds back at below face value, and profiting from the difference.

Last week Commerzbank launched a tender for up to €1bn of its outstanding debt while Allied Irish Banks offered for up to €3.9bn of its debt.