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
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