(Bloomberg) -- Deutsche Bank AG reached a deal to change the terms of an additional tier 1 note away from the discontinued Libor rate after sweetening the deal for bondholders. 

Investors in a $1.25 billion AT1 bond voted for a proposal that will alter the rate used to calculate coupon payments to the Secured Overnight Financing Rate, or SOFR, the bank announced on Monday.

It’s a victory for Deutsche Bank because without the change, it could have been impossible for the bank to calculate the floating coupon based on the London Interbank Offered Rate, which was officially discontinued this year. There’s still nearly $21 billion of AT1s that face disruptions due to Libor, meaning more banks will face the same predicament. 

“It would have been problematic for Deutsche Bank,” said Filippo Maria Alloatti, head of financials at Federated Hermes. “It’s more of an operational headache as they have more important things to care about at this stage of the cycle than Libor replacement.”

Deutsche Bank tried changing the terms less than a year ago but failed to attain a quorum for the votes. This time, it offered a fee of 0.5% to sweeten the deal. 

The lender has one another $1.5 billion of AT1 that will need to be dealt with, according to analysts at CreditSights Inc. AT1s are a kind of hybrid security combining characteristics of debt and equity.

Pandemic Delay

For Deutsche Bank, its AT1 dilemma dates back to the pandemic. As the AT1 approached its first call date back in early 2020, its price indicated that an early repayment was forthcoming. But when the coronavirus struck, the cost of replacement issues became punitive and effectively forced the lender to stick with the issue past the end of Libor.

Deutsche Bank’s bonds are governed by German law, making such a vote feasible. Notes under New York jurisdiction would typically need unanimity to pass any changes, making such moves impractical. In those cases, analysts expect banks to use call options to repay them.

The Libor transition became a hot topic for US banks after Morgan Stanley turned some of its preferred shares to a fixed-for-life rate, drawing the ire of some investors.

“Consent solicitations to change the reset reference rate on AT1s have been a struggle, as some investors want to increase the probability of a call, so banks have had to accept that offering a consent fee is the best way to ensure success,” said Simon Adamson, head of global financials research at CreditSights.

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