#Deutsche Bank sinking but .....

Deutsche Bank Bonds junk like 

• German lender added $1.5 billion to a $3 billion deal
• Notes priced to yield 2.9 percentage points over benchmark

Investors piled into Deutsche Bank’s latest bond sale, seeking a second helping of notes sold less than a week ago at yields resembling junk debt.

The German lender sold another $1.5 billion of investment-grade notes on Tuesday to mostly the same investors who bought last week’s $3 billion private deal, according to a person with knowledge of the matter, who asked not to be identified because the information isn’t public. Pacific Investment Management Co. was among the buyers, according to data compiled by Bloomberg.

The deal was priced at a premium of 290 basis points, close to the average of 300 basis points for highly-rated junk debt in dollars and more than twice the 143 basis points Deutsche Bank paid for similar notes in August 2015, 

The notes were Deutsche Bank’s first since the U.S. Justice Department demanded $14 billion to settle claims that it misled investors over mortgage-backed securities before the American housing crisis. The claim has fueled concerns about the lender’s financial health and pushed its share price down more than 45 percent this year.

“The private debt sale shows they can still access the market for sizable term funding,” said Ben Sy, head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong. Even so, “it has to pay a significant premium and that may shake confidence among investors,”

The bonds will become more vulnerable to losses from Jan. 1, when a German law takes effect that subordinates existing notes to deposits, derivatives and structured notes. Senior bonds could be bailed in if post-tax losses exceed 20 billion euros or if some lower-ranking bonds don’t provide a cushion because they’re not governed by EU law, Hank Calenti, an analyst at Wells Fargo & Co. in London, wrote in a note to clients.

“Short term, it’s a good thing for Deutsche that they’re raising money even though they have to pay a higher spread than they want to,” said Jonathan Rochford, a Sydney-based portfolio manager at Narrow Road Capital, which manages A$35 million ($26.5 million). “It gives people confidence that they’re getting funding. But the long-term issues haven’t changed. They’re still undercapitalized.”

The October 2021 notes are combined with a sale on Oct. 7 and pay a coupon of 4.25 percent

Yet the biggest impression from the sale isn't that it happened but rather how much it cost Deutsche Bank to get it done. The lender had to pay twice as big a premium to borrow as it did a year ago, 3 percentage points above benchmark rates compared with 1.4 percentage points in August 2015 on a public sale of similar notes, Tom Beardsworth of Bloomberg News pointed out.

Let's take a step back for a moment to understand just how significant this is. Since August 2015, developed-market government bond yields globally have plunged almost in half, to an average 0.6 percent. Yields on dollar-denominated bank bonds have dropped on average while those on investment-grade bonds globally recently plunged to the lowest on record. This has been a historically terrific year for bonds and almost anyone who wanted to borrow money.

www.bloomberg.com/gadfly/articles/2016-10-11/deutsche-bank-bond-gambit-sends-wrong-message-to-market

It's quite different for Deutsche Bank, however. It's getting materially more expensive for the lender to borrow as it negotiates a settlement with the U.S. Department of Justice related to its handling of mortgage-backed securities.

This just showcases how much credibility the bank has lost in credit markets. Its bonds have the highest average yield among the top 50 bank-bond issuers in the U.S. as well as Europe, according to Bank of America Merrill Lynch index data.

Trailing the Pack

Deutsche Bank has the highest borrowing costs among the biggest bank issuers of bonds

Put another way, Deutsche Bank would have to pay $39.3 million in annual interest on $1 billion of dollar-denominated debt, more than $10 million more than Credit Suisse, Citigroup, Goldman Sachs and Bank of America would have to pay on a similar amount of debt, based on current yields tracked by Bank of America Merrill Lynch index data. That extra expense adds up quickly for a firm like Deutsche Bank, which has more than $100 billion of debt.

While Deutsche Bank may have hoped for this debt issuance to prove its resiliency, it simply underscored its challenges. Everything is becoming more difficult for the bank, even borrowing money at a time of near record-low yields.

Can Deutsche Bank Dig Itself Out of Its Massive Hole?

None of the options are great.

Deutsche Bank  DB 0.15%  has kept a tight ship this week, with little in the way of firm news to say how it will cope with the Department of Justice’s $14 billion claim against related to misselling mortgage-backed securities before the 2008 financial crisis.

As we’ve previously said, if the final penalty is anywhere close to that figure (Deutsche says it won’t but previous settlements say it might), it will blow a hole in the capital ratios of Germany’s largest bank.

Regulators insist that banks maintain reserves large far larger than they would need to cover any imminent threat to from potential lawsuits, fines, bad loans, or losing trades. That’s to avoid bank runs, which happens when people en masse start to think that’s not the case. But when that reserve, or capital, falls below what regulators think is necessary, there are a number of ways of restoring them. All have their downsides. Here’s a brief rundown what Deutsche Bank’s options are—not of them great:

Sell More Shares: The simplest, and classic, option is to raise more equity with a share sale. The main problem with that is share holders don’t tend to like it. New shares dilute The Wall Street Journalreported earlier Friday that the Gulf Emirate of Qatar is “concerned” about the outlook-as well it might be, having made substantial losses since first subscribing to a capital increase in 2014. It has since raised its stake to nearly 10% and is now Deutsche’s biggest shareholder. The German government, buyer of last resort in many people’s minds, has reportedly ruled out taking a stake.

Cut Costs: The bank said at the start of the week it would add another 1,000 to the 3,000 job cuts in Germany it had already announced, as part of a global reduction of 9,000. It also said there would be no more cuts this year in Germany. However, aReuters story Friday claims that chief financial officer Marcus Schenck has told staff another 10,000 may need to go. That means more restructuring costs spread over a longer timeframe, which will be awkward for CEO John Cryan to present, given that he promised 2016 would be “peak restructuring” year.

Cut Costs (II): Deutsche is notorious, at least in Germany, for the generosity of its bonus pool. Dan Davies of Frontier Analysts argues that one way of conserving cash this year would be for the whole bonus pool to be issued in the form of shares. The problem with that, is unlike a regular share sale, that wouldn’t create any more capital until the shares were exercised, which give the direction the Deutsche Bank’s stock price recently could be a while. What’s more, Cryan hasn’t given any indication yet that he’s prepared to go that far, afraid of losing top traders and bankers to competitors.

Exit Businesses: At the end of September, the bank sold its U.K. insurance business, Abbey Life, to another U.K. insurer, Phoenix for just over $1.2 billion. That was a good start, but it’s not enough. What’s more, it realized a loss on selling that business, which hadn’t been a good performer, limiting the positive impact on the capital ratio to around 0.1 percentage point. Nonetheless, Deutsche’s shares still rose on the news.

Now the rumor is that the bank could sell its asset management division, which analysts think is worth over 8 billion euros (equal to half the total value of the group at this point). This rumor first did the rounds in August. At the time Cryan squashed it. “There is one rumor in particular that I would like to dispel by making it unambiguously clear thatDeutsche Asset Management is and will remain an essential part of our business model,” Cryan said at the time.

Ditching asset management would mean that Deutsche was no longer a “universal” bank, the label it has long prided itself on. In a spreadsheet comparing it with its peers, there would be an uncomfortable blank where rival Credit Suisse  CS 0.00%  and UBS  UBS -0.75%  had tidy little checkmarks. However, a close look at that statement doesn’t flatly rule out a partial sale, and the Financial Times reported last week that the bank is considering an IPO for the business. An IPO would have the charm of reducing risk-weighted assets, raising capital and still keeping control of a business it needs in order to be a one-stop shop for its priv

Why i am long WITH Deutsche Bank -LALIASIA FINANCE

Because I am contrarian-I MEAN  -LALIASIA FINANCE

The German bank resembles U.S. banks eight years ago, which rebounded after hitting rock bottom-By Michael Brush
The biggest problem for Deutsche Bank is that the U.S. Department of Justice wants to fine it for its role in creating asset-backed securities that contributed to the 2008 financial crisis. That might cost the bank $5.4 billion.
BUT THEN OTHERS DID WHY NOT GERMAN BANK DO THE SAME

Jasper Juinen/Bloomberg

The biggest problem for Deutsche Bank is that the U.S. Department of Justice wants to fine it for its role in creating asset-backed securities that contributed to the 2008 financial crisis. That might cost the bank $5.4 billion.

For a moment recently it felt like déjà vu all over again, to steal a line from Yogi Berra.

Fears circulated about a major bank failure that would create systemic risk and sink the economy of an entire region.

It sounded a lot like 2008-2009. Except the region was Europe and the bank was Deutsche Bank AG DB, +1.44% not the U.S. and Lehman Brothers.

This kind of flashback can send shivers down your spine. But depending on how you behaved during the crisis eight years ago, this flashback might also bring up some great memories.

After all, had you bought most any of the major banks after the worst of the financial meltdown, or any of the subsequent mini-panics, you did well. The shares of U.S. banks that seemed destined for a meltdown back then — Citigroup Inc. C, +0.78% Bank of America Corp.BAC, +0.53% or even J.P. Morgan Chase & Co. JPM, +1.15% — are up twofold, threefold or more.

Now, you’re getting another shot with Deutsche Bank. And you should take it.WONDER IT CAN BE SO CONVINCING?

Sure, there are risks. There are more shoes to drop at Frankfurt, Germany-based Deutsche Bank. And it won’t be an overnight success as an investment. But Deutsche Bank is not going to blow up and disappear, as some investors fear. And shareholders probably won’t get diluted to smithereens by a capital increase to shore up the balance sheet either — another big worry.

Nonetheless, Deutsche Bank’s stock remains one of the most widely despised names in the market. This makes it a contrarian’s dream. Let’s take a look at six reasons to buy Deutsche Bank now.

Reason 1: Everyone already hates Deutsche Bank (which can be good news)  AGREE

Virtually all sell-side analysts are negative on this bank. Most report ratings of “sell” or “hold,” the latter of which is typically a code word for “sell” on Wall Street. The median price target is $9.97, according to Thomson Reuters. In other words, the analysts who cover this stock are predicting a decline of about 25% from recent levels of $13.39. Deutsche Bank already has sunk 44% this year.

Of course, sell-side analysts are often right. But you have to ask yourself: With analysts so negative, how many investors are left to turn negative and sell, putting more downward pressure on the stock? Not many. And if things start to go right, there are a lot of investors around to turn positive and get in.

Reason 2: The stock is incredibly cheap I AGREE

All the big banks in Europe — like Credit Suisse Group AG CS, +1.85% UBS Group AGUBS, +0.60%  ING Groep NV ING, +1.78%  and Banco Santander SA SAN, +2.05%  — look cheap because they are trading below book value. These banks trade for 0.6 to 0.95 times book because of worries about the European economy and exposure to dud loans. But even compared to them, Deutsche Bank looks really cheap. It trades for only 0.24 times book value.

Reason 3: The bank is losing money, but things could improve-I AGREE

A big problem for banks on the continent is that the European Central Bank (ECB) has pushed interest rates into the negative zone to try to spur growth.

“It is hard for a bank to make net interest margin when you have negative rates,” says Brian Frank, manager of the Frank Value Fund FRNKX, +0.00%

But what if growth actually does improve in Europe? That would not only ease worries about loan-growth potential and exposure to bad loans at Deutsche Bank, but it would also have the ECB scaling back negative rates.

No one knows for sure when, or possibly if, Europe will ever get out of the doldrums. But for the first time during this recovery, all of the major economic regions of the world are in stimulus mode. So there’s a new dynamic that could be good for global growth, including in Europe.

Japan has backed away from an earlier hesitancy on stimulus. And China and Europe have reversed policies to slow growth that were in place at various points in recent years, post-meltdown.

“For the first time in this recovery, nearly all global economic policies are aligned,” says James Paulsen, an economist who is the chief strategist at Wells Capital Management. That makes the odds of a synchronized global economic bounce far more likely than many investors think, he says I WONDER

Reason 4: The risk-reward may be in your favor- MAYBE NOT CERTAIN

“Clearly the market is telling you Deutsche Bank assets are worth less than their stated value,” says Frank, at Frank Value Fund, referring to the bank’s steep price-to-book discount of 0.24.

But the discount also incorporates a lot of fear and loathing toward Deutsche Bank. This could ease as European economic growth and the bank’s profitability improve, and as the bank takes steps to bolster its strength. The bottom line here is you have the potential for a three-bagger or more (200%-plus gain) if the stock trades back up above book value.

Reason 5: Europe isn’t going to let Deutsche Bank fail-  AGREE

Probably for political reasons (many Germans are weary of bank bailouts), the government of German Chancellor Angela Merkel has reportedly said it won’t be coming to the rescue of Deutsche Bank. But, in reality, it’s unlikely the government would let the bank go under. And if Germany did step aside, Europe would step in and help.

“We believe that these statements may reflect political posturing by Merkel or her supporters in the face of a heavy schedule of elections later this year and in 2017,” says Christopher Whalen, senior managing director at Kroll Bond Rating Agency (KBRA). “There is no way the ECB, the German government, or the Fed are going to let a bank this size go under. It is just not going to happen.”

Reason 6: Deutsche Bank probably will have to raise capital, but it might not be as bad as you think .WHY DO THEY NEED CAPITAL? IS THE CASH FOLLOW POOR ?NEGATIVE ?

The biggest near-term problem for Deutsche Bank is that the U.S. Department of Justice (DOJ) wants to fine it for its role in creating asset-backed securities that contributed to the 2008 financial crisis. That might cost the bank $5.4 billion. The bank may also face big fines for money-laundering in Russia, and for manipulation of foreign-exchange markets.

Deutsche Bank already has a thin capital cushion. So these numbers seem scary. But any capital increase might not be as dilutive as a lot of investors think, for three reasons.

• If the DOJ settlements with other banks are any guide, about a third of the fine might come in the form of “consumer relief” that involves no cash outlays, points out Goldman Sachs analyst Jernej Omahen, who has a “neutral” rating on the stock. (This could mean things like homeowner loan forgiveness or debt restructuring to prevent foreclosure.)
• Deutsche Bank can sell assets such as Postbank, a savings bank, to raise funds.
• Deutsche Bank is vulnerable, but not desperate. “We do not believe that Deutsche Bank faces any imminent danger of illiquidity or failure,” says Whalen. “KBRA views Deutsche Bank as both financially stable and having more than adequate liquidity.” Whalen has an investment-grade rating on the bank’s debt. “They are not desperate,” he says. Whalen offers no forecast on how dilutive any capital increase might be. But his overall assessment suggests the bank has room to wait, and that the funding might not dilute stockholders by an excessive amount.

Your biggest problem might be boredom

A big risk is that investment shops or depositors pull their funds because they become worried about Deutsche Bank’s solvency, notes Frank. At that point, failure of the bank turns into a self-fulfilling prophecy. But “a bailout or a capital raise would be a way to shore up confidence in the bank and stop a run” on it, he says.THEY DID WELL FEW DAYS AGO

Barring that kind of crisis, though, you can expect a slow-motion recovery for Deutsche Bank and its stock.

“Europe has some work to do to shore up its banking system, and it is not going to go away soon. They tend to kick the can down the road,” says Frank.

Or, as Whalen puts it: The biggest danger investors face with large European banks is that they get “bored to death” waiting for a turnaround. This isn’t just a joke. Boredom is a significant risk in investing, because it can make you sell a stock right before a big move up. It’s happened to me.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested JPM, C and BAC in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.