UPDATE 1-RBI seeks to optimise capital structure with sub exchange

(Adds background, context and issuer comment)

By Helene Durand

LONDON, Oct 10 (IFR) - Raiffeisen Bank Internationalannounced plans to optimise its capital structure on Wednesdayby asking investors to exchange an Upper Tier 2 note callablelater this month into a new longer dated Tier 2 security.

However, RBI's offer came at the same time as a warning toinvestors that it would decide whether to call the 5.77% EUR600mbond (callable on October 29) with reference to prevailingregulatory, economic, and market conditions.

It is the first time that the Austrian bank has used thistype of wording on an announcement related to Tier 2 debt. Thebank has previously always exercised the call option on thattype of paper.

It did, however, use similar wording when it conducted ahybrid Tier 1 buy-back in February/March of this year. It isalso following a growing number of issuers that have usedsimilar wording in their liability management announcements asthe environment for refinancing subordinated debt has becomemore challenging.

According to a spokesperson at the issuer, RBI wants to giveinvestors the opportunity to switch into a new security thatwill pay more than the outstanding once the call date haspassed.

The 5.77% coupon on the Upper Tier 2 will switch to Euriborplus 215bp after October 29, which equates to around 2.35%, muchlower than the proposed 5.875% coupon on the new Tier 2.

The spokesperson added that there would also be a capitalbenefit for RBI.

"The Upper Tier 2 notes lose 40% of regulatory capitaleligibility after the call date, whereas we expect the new bondsto be 100% eligible, although we will only have full clarity onthis once the final vote on the Capital Requirement Regulationhas been passed," she said.

"We evaluated various options and felt this approach wouldbe a good solution for investors and the bank."

RBI looks set to be able to achieve a better pricing fromthis captive investor base via liability management than itwould have been able to in the primary market.

For instance, a EUR500m bullet Tier 2 for Erste Bank pricedat the beginning of October with a 7.125% coupon and a spread of540bp over mid-swaps.

The new notes will mature on April 27 2023 and have aone-time call on April 27 2018. The 5.875% coupon on the newnotes will be non-deferrable and will have a one-time reset atmid-swaps plus 484bp. The exchange will be on a par-for-parbasis.

The offer expires on October 23 and will be settled onOctober 29. Deutsche Bank, Bank of America Merrill Lynch, RBIare handling the exercise.

RBI is no stranger to liability management. The bank made aEUR113m capital gain from its hybrid buy-back executed in Marchat a discount to par, which improved its capital ratio by 0.12%.

(Reporting by Helene Durand; editing by Alex Chambers)

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Keywords: RBI/DEBT EXCHANGE