Debt Assurances

Code Red at Deutsche Bank

ARCHIV - Die Türme der Deutschen Bank ragen neben einer roten Ampel in den nächtlichen Himmel in Frankfurt am Main, aufgenommen am 26.11.2003. Die Deutsche Bank erwartet wegen gigantischer Abschreibungen für das dritte Quartal einen Rekordverlust und stimmt auf weitere Belastungen ein. Unter dem Strich dürfte ein Minus von 6,2 Milliarden Euro stehen, wie der Frankfurter Dax-Konzern überraschend am 07.10.2015 ankündigte. Foto: Arne Dedert/dpa +++(c) dpa - Bildfunk+++
Deutsche Bank was forced late Monday to reassure investors that it had enough money on hand to service its debt. [M] Arne Dedert/dpa
  • Why it matters

    Why it matters

    Deutsche Bank is facing a vicious cycle of share sell-offs and increasing concerns that the bank will not be able to pay off its debts.

  • Facts

    Facts

    • Deutsche Bank on Monday said it had €1 billion in cash reserves and €4.3 billion for 2017 to pay off interest owed to bondholders.
    • The bank owes holders of so-called CoCo bonds €350 million by April this year.
    • CoCo bonds are a new form of debt, created since the financial crisis, that can be converted into shares if a bank’s reserves fall below a level set by regulators.
  • Audio

    Audio

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On the face of it, it was a rather banal statement. Deutsche Bank on Monday night announced it had “sufficient” cash on hand to pay interest on bonds due this year and in 2017.

And yet, the fact that Germany’s largest bank had to issue such an assurance speaks volumes about the frayed nerves of its shareholders, and of its embattled management led by Co-Chief Executive John Cryan.

The Frankfurt-based bank became the largest lender in at least four years to have issued such a statement assuring bondholders it can pay its debts, according to the news agency Bloomberg.

The statement came after another awful start to the new week. Shares closed down 9.5 percent at €13.82 on Monday, marking yet another record low for the German banking champion.

Shares renewed their decline on Tuesday, falling another 3 percent in the afternoon and prompting Mr. Cryan to once again double down on his assurances that all was well at the bank’s twin-tower headquarters.

“Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position,” Mr. Cryan who has been in charge of the bank for just seven months, wrote in a letter to employees that was published on the bank’s website.

To be sure, European banking stocks have been hit across the board. The STOXX Europe banking index fell more than 5 percent Monday and has lost nearly a quarter of its value since the start of this year as many investors fear record low interest rates and slowing global growth are weighing on financial sector profits.

But Deutsche Bank, as has been the case for most of this year, led the declines. The bank’s share price has plummeted nearly 40 percent since the start of 2016 and is down about 55 percent over the last six months, since Mr. Cryan took charge.

 

A Record Loss for Deutsche Bank-updated feb 1 2016

 

The once-proud bank is not only being affected by the general malaise in European banking, but also by its own set of challenges, including the costs of hundreds of ongoing lawsuits and regulatory investigations, and questions about whether the bank’s own prescription of cut-backs and a deep restructuring will ever really return the bank to profitability.

“Investors have completely lost trust in the bank,” said one large shareholder, who declined to be named.

“Investors have completely lost trust in the bank.”

Deutsche Bank Shareholder

Monday’s sell-off was caused in part by a warning from analysts at Creditsights. The group suggested that, while it was confident Deutsche Bank could pay its debts for 2016, there were questions about 2017.

Specifically, the concerns have surrounded a new form of debt, known a Contingent Convertible Bonds, or CoCos, which have become popular with banks since the 2008 financial crisis.

CoCos are an answer to the new demands of regulators, who have sought to ensure that shareholders of financial firms will bear the brunt of any future banking collapses, rather than taxpayers. Deutsche Bank began using CoCos in 2014, issuing some €5 billion that year.

Unlike regular bonds, CoCos can be automatically converted into capital if the bank’s reserves fall below 5.125 percent of its assets. Bondholders, in that case, would lose everything, though the bank is allowed to pay back the debt once it returns to a healthier state.

Deutsche Bank remains well away from that emergency scenario. The bank reported a Tier 1 capital ratio of 11.1 percent at the end of 2015.

 

Deutsche Bank Takes Its Losses-01

 

Still, investors are asking the bank to pay a heavy price for the risk. Deutsche Bank, according to its own earlier figures, has had to pay a coupon of 7.5 percent on a U.S.-dollar tranche of CoCo bonds.

That high price is what’s putting pressure on its reserves. In its statement Monday night, Deutsche Bank assured investors it had about €1 billion of cash available, “sufficient” to pay the roughly €350 million in interest payments on CoCo bonds due in April of this year.

For next year, Deutsche Bank said its reserves amount to about €4.3 billion – not including operating profits from this year.

“Today, our capital and risk position remains strong, and this enables us to address these requirements from a position of strength,” Marcus Schenck, the chief financial officer of Deutsche Bank, said in a statement.

The trouble for shareholders: How much of those reserves will be left over at the end of this year?

Last year, Deutsche Bank lost a record €6.8 billion. Mr. Schenck conceded at the bank’s annual press conference last month that he couldn’t rule out another loss for 2016, though it is unlikely.

 

118 Deutsche Bank-01 WTB 2014

 

Investors aren’t taking any chances. The market for credit-default swaps, a form of insurance against debt that was a key measure of the uncertainty in the 2008 financial crisis, has swelled since the start of the year.

Just since the middle of January, the risk premium for Deutsche Bank credit-default swaps has doubled. Investors looking to insure €10 million in bonds now have to pay €232,000 annually – up from just €100,000 at the start of the year.

 

Michael Maisch is Handelsblatt’s deputy finance chief in Frankfurt. Christoper Cermak is an editor at Handelsblatt Global Edition, covering finance and the economy. To contact the authors: maisch@handelsblatt.com and cermak@handelsblatt.com

This story was updated at 4pm Central European Time with updated share price moves and a new statement from Deutsche Bank CEO John Cryan.

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