NEW YORK/LONDON, Oct 14 (IFR) - Deutsche Bank's US$4.5bn bond issue showed it still has market access amid its recent turmoil, but the deal's steep price - and the way it was sold - left many questioning the trade's rationale.
The struggling German lender, facing a US Department of Justice fine of up to US$14bn, priced a US$3bn bond offering late on Friday October 7 after many in the market had left for the long weekend in the US.
It then returned in the very next session on Tuesday with a US$1.5bn tap of the five-year trade, paying an apparently unnecessary premium that some said smacked of desperation.
"They did show strength with the first US$3bn deal," one senior banker told IFR. "But what I did not understand was the necessity of the US$1.5bn tap, and the spreads at which [it was] done."
The original deal, which sources said was driven by reverse enquiry, was priced at 300bp over Treasuries - a massive 50bp premium to where Deutsche's bonds were trading at the time.
Yet even after the new deal rallied to 265bp in secondary trade, Deutsche still priced the tap at 290bp - an eye-watering 25bp wide of the initial transaction.
If the idea was to show market access, the public relations exercise looked to have gone rather wrong.
"It made less sense on Tuesday because of the way the bonds were priced," a second banker said. "It now really looks like they need the cash."
Sources at Deutsche, however, said the reason for the execution was far simpler.
Investors were interested in new Deutsche paper, they said, as the bank's spreads had widened close to 300bp after news broke in September about the potential DoJ fine.
The first deal was sold after those enquiries, and many buyers just came back for more, prompting Deutsche to tap the initial issue.
Pimco was a major investor in both deals after approaching Deutsche first, Reuters reported, citing a source familiar with the matter.
And while sources said proceeds were to be for general corporate purposes, that could include helping the bank meet its funding target for the year.
Deutsche was just two-thirds through its US$30bn debt-raising target for 2016 by the end of June, and the new deal gets it closer to the goal.
The bank also had only a limited amount of time to sell new debt before it enters its earnings blackout period, with third-quarter numbers due on October 27.
For that reason, sources said, Deutsche chose to issue in a 144A-for-life format, rather than an SEC-registered deal that would have required more documentation and time to prepare.
Some rival bankers said this made sense.
"GCP could mean anything from terming out commercial paper before new money market reforms become effective on October 14, or preparing for the Justice Department's settlement, balance sheet enforcement," said one senior banker.
"The deal is positive."
Still, both the pricing and execution left many in the market wondering about some of the bank's decisions.
Some questioned why the 144A deal was not syndicated to the broader market, where pricing may have been much more attractive for the bank.
Even as a club-style deal sold to a closed group, the tap could have cleared the market with a much smaller concession, if any.
And keeping such a premium-heavy deal behind closed doors may well have left some buyside accounts disgruntled.
"They may find a lot of people that are pretty angry with them - people who were out trying to buy their paper in secondary who they didn't give an opportunity to buy either the original deal or the tap," said Bill Hines, a senior trader at Aberdeen Asset Management.
Meanwhile, rival bankers in London were surprised that Deutsche was able to execute the bonds in the way it did without breaching the European Union's Market Abuse Regulation, which came into force over the summer and applies to all issuers with securities listed on an EU exchange.
Indeed, some were sceptical that the deal's execution was fully compliant with MAR, which contains strict rules on so-called wall-crossing, or the selective disclosure of inside information.
"A lot of clients are asking about this deal," said one London-based banker. "They are asking: how did they do that if they didn't wall-cross?"
A spokesperson for Deutsche said: "We have policies and procedures in place to ensure compliance with all applicable regulations, including MAR." (Reporting by Shankar Ramakrishnan and Will Caiger-Smith; Additional reporting by Natalie Harrison and Alex Chambers; Editing by Jack Doran and Marc Carnegie)