Friday, December 19, 2008

Deutsche Bank faces buyer strike over bond move

By Paul J Davies iand James Wilson in the Financial Times:

Deutsche Bank is facing the prospect of a buyers’ strike against its own debt and even debt it tries to sell on behalf of others as investors protest against the bank’s decision not to redeem a bond deal this week.

The German bank shocked bond and equity investors – and raised fears about its own capital strength – on Wednesday when it became the first big bank to say it would not repay the €1bn ($1.42bn) bond as expected in January.

The move makes it more likely that other banks will not repay their own extendable so-called hybrid-capital bonds. Such instruments helped banks expand their balance sheets before the financial crisis and have played an important role in shoring them up since.

“We are treating this issue very seriously and are extremely disappointed with Deutsche Bank,” Richard Thomson, of Henderson Global Investors, said. “They consistently led us to believe that these deals would be called and they led us to believe that it was not an economic issue but a reputational issue.

“We have told Deutsche that unless circumstances change we will not buy any Deutsche Bank new issues and have spoken to at least five other big sterling fund managers who said they will take this stance.”

The Association of British Insurers said it was “disappointed and concerned”. “We would urge other major banks to continue to support markets in the medium term by honouring calls on bonds as per normal market practice,” it said.

Industry members are also seeking signatories to a letter to other banks, seen by the Financial Times, in an attempt to persuade them not to follow Deutsche’s example.

Members of L’Association Française de la Gestion Financière, the leading French asset management association, were considering cutting relations with Deutsche Bank entirely, investors said.

People close to Deutsche said that it had to consider the interests of shareholders as well as bondholders. “In the end, a lot of people will realise that this is a rational decision – and people will want to invest in banks that make rational and conservative decisions. It will be interesting to see what other issuers do.”

A buyers’ strike might not hurt Deutsche too much as it is not expected to raise much funding next year. The reputational damage could also be limited if many other banks follow its lead.

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