Bloomberg News

Rabobank to Halve Bond Sales on Debt Turmoil: Corporate Finance

December 06, 2011

Nov. 24 (Bloomberg) -- Rabobank Nederland, the fourth- largest corporate bond issuer in Europe, plans to halve sales of senior debt next year to reduce its reliance on a market roiled by the sovereign crisis.

The world’s highest-rated private lender will seek 20 billion euros ($27 billion) to 25 billion euros from senior bond offerings in 2012, according to Michael Gower, the head of long- term funding at Utrecht-based Rabobank. Investors will be denied AAA rated securities that returned 3.3 percent this year, more than double the average for securities in Bank of America Merrill Lynch’s EMU Corporates, Banking index.

“We’ve been extremely conservative by raising a significant amount of capital over a number of years, just to be prepared for what was a highly unlikely scenario that we’re now living in,” Gower said in an interview. “The bank doesn’t need to borrow until 2013 so there’s no pressure.”

Rabobank raised more than 40 billion euros from senior debt sales this year, 43 percent more than it needed to refinance securities coming due. The lender is stockpiling reserves as the debt crisis intensifies, sending borrowing costs in core economies outside Germany to euro-era records and driving relative yields on bank bonds to the highest since May 2009.

European banks face about 400 billion euros of debt coming due next year, ING Groep NV data show. The extra yield investors demand to buy bank bonds instead of government debt has climbed 171 basis points this year to 406, and reached 411 on Oct. 5, according to Bank of America Merrill Lynch’s index.

Dutch Farmers

Rabobank’s bonds yield 3.2 percent on average, according to Bank of America Merrill Lynch index data. That’s less than the 5.8 percent average for the 803 securities in the bank’s European financials index, and below the 4.9 percent that investors demand to hold U.S. bank bonds in its U.S. Corporates, Banks gauge.

Rabobank, formed in 1898 as a cooperative lender serving Dutch farmers, is the world’s biggest agricultural bank with operations in 48 countries, according to the lender’s website. Net income climbed to 1.85 billion euros in the six months ended June 30, a 13 percent increase from the same period a year earlier, the bank said in August.

The lender has the top ratings from Moody’s Investors Service and Standard & Poor’s. Fitch Ratings ranks it one level lower at AA+.

Less Volatile

“Given its conservative structure, Rabobank gives you banking exposure with less volatility,” said Andreas Fischer, a Zurich-based fund manager at Clariden Leu AG, which oversees $102 billion of assets, including some Rabobank bonds. “People will like the fact that they get a relative attractive yield pickup for a bond they can allocate to their AAA rating bucket.”

The cost of insuring against a Rabobank default has risen 36 percent since Oct. 28, about half the jump in a benchmark index of bank-bond risk.

Credit-default swaps on the Dutch lender climbed to 129 basis points, the highest since May 2009, from 95, CMA prices show. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 65 percent in the same period to a record 342 basis points, according to JPMorgan Chase & Co.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of bonds.

Windows Closing

The Netherlands’s second-largest bank had a core Tier 1 capital ratio of 12.7 percent at the end of June, up from 12.6 percent six months earlier and 11.8 percent in June 2010. That compares with the 9 percent minimum required by the European Banking Authority.

Rabobank faces 33.3 billion euros of maturing debt in 2012 and 20.5 billion euros the following year, according to the lender’s data. The bank said it almost doubled its cash reserves to 26.1 billion euros at the end of June compared with 13.5 billion euros in December, and 9.4 billion euros in June 2010.

The Dutch bank is cutting issuance as the euro region’s crisis damped bank and corporate bond sales to a five-year low, according to data compiled by Bloomberg. Sales slumped after July with just 10 percent of this year’s 121 billion euros of senior, unsecured bonds sold since then, according to Societe Generale SA.

“For us, it’s a question of whether there really is a market window to take advantage of,” said Rabobank’s Gower, who’s overseen the lender’s long-term funding and capital raising since 2005. “There will be a fewer windows for banks to issue and fewer banks prepared to issue in those windows.”

Long-Termism

Rabobank is focusing on sales of senior unsecured debt for its market funding, eschewing the trend for more issuance of secured obligations. Sales of covered bonds, debt backed by loans and guaranteed by the issuer, soared to a record 337 billion euros this year as banks struggled to fund themselves through conventional securities.

“What covered bonds do in these institutions is take the best assets in the balance sheet and tie them up,” said Gower. The issuance boom is “weakening credit in the European banking sector, and we don’t think that’s a good thing,” he said.

Rabobank’s surplus issuance this year is helping the lender reduce its short-term financing. Borrowing due within one year equates to 11 percent of the bank’s 665 billion euros of assets at the end of June, down from 12 percent a year earlier and 17 percent in 2008, Gower said. By contrast, long-term funding increased to 24 percent of assets from 22 percent in June 2010 and 17 percent in 2008.

“Given recent issuance, they are doing the prudent thing, which is prefunding,” said Roger Webb, a London-based fund manager at Scottish Widows Investment Partnership. “I can’t see any environment where bank funding gets easier.”

--With assistance from Ben Martin and John Glover in London. Editors: Andrew Reierson, Paul Armstrong

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Maud van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net


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