Germany’s DZ Bank is relaunching its subordinated debt issues

A sign that the tension is falling after the crisis caused by the collapse of Credit Suisse, the second German bank, DZ Bank, launched this week the issue of low debt AT1 (Additional Title 1). It was more successful than expected by raising 1.1 billion euros from its members, German cooperative banks, instead of the targeted 850 million.

This is the first AT1 release in Germany since the bankruptcy of Silicon Valley Bank (SVB) and the collapse of Credit Suisse. The importance of this type of bank debt created after the financial crisis of 2008 is that, on the one hand, it allows banks to strengthen their equity, on the other hand, it can be converted into shares or reduced when the bank must be liquidated.

However, the Swiss market watchdog, Finma, settled by deciding to put Credit Suisse shareholders ahead of AT1’s bondholders in the ranking of creditors. The value of 16 billion Swiss francs of junior bonds was reduced to zero. Since then, bondholders have filed a complaint against the Swiss regulator and the European market regulatory authority has launched an investigation into the subject.

A “well protected” group.

If DZ Bank is the first to revive the machine in Germany, other banks have already installed the pump. Japanese bank Mizuho Financial Group is expected to follow in early July Sumitomo and Mitsubishi UFJ, which were the first to reissue AT1 bonds, in yen in Japan. Decisions by UniCredit in Italy and Lloyds Banking Group in London to reissue AT1s also helped calm the markets.

In Germany, it is undoubtedly “a good thing” that DZ Bank, which is mainly protected as a mutual group, is “testing the water depth first”, estimates Hans-Peter Burghof, who heads the Institute of Financial Management from the University of Hohenheim. . .

DZ Bank decided to launch these bonds because of the “good development of business and capital”, explained its leaders in a letter to the cooperative banks, which they control. Its equity ratio was already 13.7% at the end of 2022. “According to industry practice, 1.84% of this equity can be covered by AT1 capital”, or 850 million for DZ Bank.

Threshold that therefore raised, taking into account the interest declared by subscribers. Rating agencies S&P and Fitch had rated DZ AT 1 bonds “BBB-” and “BBB+” respectively, “one of the highest ratings in the European banking market”, according to DZ Bank.