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Rabobank to Take Break From Bond Sales as 2012 Funding in Place

May 10, 2012

Rabobank Groep, whose credit rating is the best of any non-state-owned bank in the world, is taking a break from tapping bond markets after meeting its 2012 funding goal in four months, selling debt in more than 25 currencies.

“Do not expect to see Rabobank on a very regular basis in public benchmark format for the rest of the year,” Chief Financial Officer Bert Bruggink, 48, said in an interview in the Dutch lender’s headquarters in Utrecht. “We are extremely liquid at this moment.”

Rabobank, the biggest Dutch mortgage lender, has raised 23 billion euros ($29.8 billion) by issuing bonds this year, above the 20 billion euros planned for 2012. As investors hunted for top-rated securities, the extra yield, or spread, demanded to hold Rabobank debt rather than the safest government bonds fell to the lowest level since October. The lender has almost 100 billion euros of cash deposited with central banks, just below the peak level at the start of the year, Bruggink said.

The spread on 10-year Rabobank debt over German government debt of similar maturity, the European benchmark, has contracted 47 percent so far this year.

Rabobank’s 1.85 billion euros of 3.374 percent bonds due 2016 trade at 66 basis points above the asset swap rate, a benchmark commonly used to price bonds. That’s close to the eight-month low of 63 basis points on May 8 and compares with 120 basis points, or 1.2 percentage points, at the end of year, according to Bloomberg Bond Trader bid prices.

Rabobank, a Dutch cooperative made up of independent lenders, doesn’t trade on the stock market.

LTRO Effects

“You never know what’s going to happen in the near future,” said Bruggink, who became CFO in 2004. “We saw the opportunity and we took it. I think you won’t see Rabobank as much as you have seen us over the last couple of years.” The lender may return to the market in the second half of the year, he said, as it wants to remain “visible” to investors.

The finance chief said he has become “more comfortable regarding many European banks” after the European Central Bank’s Longer Term Refinancing Operation. The ECB pumped about 1 trillion euros into the banking system by providing three-year loans in two operations. Rabobank didn’t tap the loans.

Even as markets have deteriorated since the LTROs were implemented, Rabobank is lending 50 percent more to other banks than it did at the end of last year, when it had 25 billion euros outstanding. That was “historically low,” Bruggink said.

Rabobank’s core tier 1 ratio, a measure of financial strength, was 12.7 percent at the end of December.

Credit Rating

The lender has a top credit rating of Aaa at Moody’s Investors Service, though it’s on “negative watch,” meaning it may be downgraded. Standard & Poor’s rates the lender one step lower, at AA+. S&P said it may downgrade Rabobank due to weaker economic conditions in the Netherlands, according to a Jan. 23 statement from the rating company.

Even with its large capital buffers, Rabobank isn’t immune to the weak environment for European banks. In March, the lender said slow asset growth, competition for deposits and increased regulation, including Basel III capital demands and a Dutch bank tax, will constrain earnings, making 2012 and 2013 “not particularly promising.”

The Netherlands, where Rabobank gets about 75 percent of its earnings, entered its second recession in three years during the second half of last year. Unemployment rose to 5 percent in March from 4.1 percent last June, European statistics show. House prices, which have fallen more than 10 percent since 2008, may drop another 10 percent in coming years, Bruggink said.

‘Luxurious Position’

Rabobank, formed in 1898 as a cooperative lender serving Dutch farmers, is considering selling assets to bolster itself even further, Bruggink said.

“We still have a luxurious capital position, but maybe there is a bit more reason to become even more luxurious and therefore a bit more pressure to sell,” he said. “At least, we are now looking into options.”

The Netherlands has seen its perception as a haven eroded since the government resigned last month after failing to reach an agreement with the party on which it relied for its majority. On April 27, the government struck an emergency austerity deal with other opposition parties. In the wake of the political turmoil, investors demanded as much as 79 basis points of extra yield to lend to the Netherlands for 10 years rather than Germany, the highest premium in three years.

Market Funding

Rabobank is focusing on sales of senior unsecured debt for its market funding, eschewing the trend for more issuance of secured obligations. Banks worldwide have more than 2.5 trillion euros of outstanding covered bonds, making the securities one of their largest market funding sources.

Bruggink said he’s concerned about “asset encumbrance,” referring to a practice where banks tie up assets as collateral for securities such as covered bonds or repos with central banks. Such lenders have fewer resources available to meet claims if an institution fails.

“Asset encumbrance I’m convinced will become a serious topic for the future,” Bruggink said. “It’s not only something that’s relevant when it comes to the interbank market, but it’s also relevant when, for example, issuing long-term bonds on a unsecured basis, or even secured basis. I think it’s relevant when you are a depositor at the bank.”

Instead, the lender is diversifying its obligations into different currencies. Aside from reserve currencies, Rabobank has issued in Russian rubles, Mexican pesos and Turkish lira, and is working on its first issue denominated in China’s yuan, he said.

To contact the reporters on this story: Esteban Duarte in Madrid at; Maud van Gaal in Amsterdam at

To contact the editors responsible for this story: Paul Armstrong at; Frank Connelly at

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