Since the onset of the financial crisis, Rabobank has been well known in Europe for its pioneering approach to hybrid capital. The top rated Dutch mutual has sought to test out new securities and structures as soon as the spirit of new regulations has become clear.
It has tried out a senior contingent structure, as well as new-style tier one securities. And in 2011, as European legislators took steps towards implementing Basel III rules, the bank had a go at frontrunning the new framework, with two forward looking transactions.
Of these, Rabobanks January 2011 deal is frequently held up as being a particularly influential landmark in Europes developing hybrid capital market.
The perpetual non-call 5-1/2 year deal responded to regulatory demands for hybrid capital to be better at absorbing losses. Unable to issue securities that would convert into equity, the unlisted bank tested the water for tier one paper that would absorb losses by permanent writedown of the principal. Investors will see the face value of their bonds written down permanently if the institutions equity capital ratio a Rabo-specific capital measure falls below 8%. If that trigger is hit, the principal of the security, and any others ranking pari passu, will be written down enough to recapitalise the bank back to 8%.
The deal was not without its controversy: some institutional accounts worried about the permanent writedown aspect of the securities. But the fact the deal was able to be done and, indeed drew a whopping $7bn order book redefined the boundaries of the market for next generation hybrid capital.
It also provided a clear marker of where demand lies for such structures: in retail accounts. Private bank investors bought 79% of the deal.
Rabobank followed up with a similar transaction in November the same year. Both deals demanded a strong dose of courage on the part of the issuer. Because while the direction of new regulations may have been clear, the details were not.
Rabobank stepped out with the deal once the Basel Committee had given its verdict on Basel III rules, but before the European Commission had put out its draft of the rules.
Since Rabobanks two pioneering bank capital trades in 2011, new drafts of the Europes Basel III rules have indicated that more investor-friendly structures than what the Dutch bank structured for will be allowed. Crucially, it seems that new-style bank capital instruments may feature temporary not just permanent principal loss absorbency in future.Nevertheless, bankers say that the investor education done already has made accounts more comfortable on permanent writedown features. Rabobanks trades can take a large part of the credit for that.