What Deutsche Bank’s Plunging CoCo Bonds Just Said about the Bank’s Future

“They’re just too close to the wire.”

Shares of scandal-plagued, litigation-hammered, loss-ridden Deutsche Bank, one of the largest and least capitalized megabanks in the world, closed at €16.32 today in Frankfurt, down 50% from April last year. Investors are fidgeting in their seats, cursor on the sell-button.

In October, it had announced that it would shed divisions, clients, and employees, and hopefully some risks, and that it would scrap its dividends.

January 20, the bank reported “earnings” – in quotes because it was a sea of red ink. It had lost €2.1 billion in the fourth quarter, including €1.2 billion in its investment banking division where revenues had plunged 30%. This brought “earnings” for the year to a record loss of €6.8 billion.

You’d think Europe is still in the middle of the Financial Crisis, to run up these kinds of losses and go through these sorts of gyrations. But no. Draghi has everything in his iron QE-and-negative-interest-rate grip. Under his regime, even fiscally challenged Spain can borrow for ten years at less than 1.6%.

Last week, Deutsche Bank CFO Marcus Schenck shared his hopes on CNBC that 2018, the distant future, would be the first “clean” year. So now all hands are on deck to keep Deutsche Bank from toppling before then.

All these losses, write-offs, and fines have eaten into Deutsche Bank’s already low capital buffer. To prop up Tier 1 capital, Deutsche Bank had issued the equivalent of €4.6 billion (about $5 billion) in “contingent convertible bonds,” spread over four issues, two in dollars, one in euros, and one in pounds – something for everyone.

These CoCo bonds, as they’re called, are special: The bank can call them after a certain date but doesn’t have to redeem them; annual coupon payments are contingent on the bank’s ability to stay above certain cash and capital requirements, as specified by German and European banking regulations; and investors cannot call a default if the bank fails to make the coupon payment.

Despite the risks, yield-desperate investors eagerly gobbled them up. Now Deutsche Bank is just a hair away from breaching the limits. And there’s a lot of nail-biting.

For example, its 6% euro CoCo bonds had been beaten down to a record low of 85.5 cents on the euro by January 21, from a 52-week high in April last year of 102.11, and down from their peak in early 2014 of 104, shortly after they’d been issued.

But during the earnings call, CFO Schenck said that “we believe” that there would be enough room to pay the coupons, and that “we believe” that there are “sufficient general reserves available to cover any shortfall.” The bonds began to rally.

And on Thursday last week, Deutsche Bank announced that, yes, it would be able to make the 2015 coupon payment! Mollifying words for investors. The CoCo bonds rallied further, to hit 88.6 cents on the euro, briefly…

But it didn’t last long.

“They’re just too close to the wire,” Mark Holman, CEO of TwentyFour Asset Management in London, told Bloomberg at the time. “They said they were going to pay today, but they could just as easily have said they were going to skip. It’s not worth the risk.”

“The bank is restructuring, the board aren’t taking any bonuses, those must be clues as to the state of the bank,” he said. “They’re one big fine away from having to skip a coupon.”

And then the CoCo bonds plunged. On Friday, the 6% bonds hit a new low of 85.26 cents on the dollar. And today, according to Deutsche Börse data, they dropped again to close at a record low of 84.11.

They’re down 17.6% from their 52-week high in April and 19.1% from their high in early 2014.

Last fall, the bank announced that it wants to issue additional CoCo bonds for up to €4 billion over the years until 2020. Market expectations were for up to €7 billion as the bank wants to raise its capital buffer without asking beleaguered stockholders to step up to the plate again. So a lot of investor confidence is required to make this happen.

But investor confidence is fleeing. With its current CoCo bonds getting kicked around the gutter, it is hard to imagine that Deutsche Bank could issue more of them. If the beleaguered stockholders are again asked to fund the bank’s shenanigans, it would crush shares further. Given the new European banking regulations, the previously so convenient taxpayer bailouts are now somewhat less convenient. So investors are being handed the tab in small-ish increments, perhaps for years to come, rather than all at once, which would be the case if Deutsche Bank toppled.

In this negative interest rate environment, the Bank of Japan did a desperate head fake. Read…  QE in Japan Nears End: Daiwa Capital Markets

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  33 comments for “What Deutsche Bank’s Plunging CoCo Bonds Just Said about the Bank’s Future

  1. Keith says:

    The world’s number one in derivatives ……….

    Is a new financial black hole blinking into existence?

    A dark shadow hangs over the world, an opaque market that operates out of sight and dwarves all other markets, i.e. complex derivatives. This market is currently estimated at 1.5 quadrillion.

    We become aware of its existence when it blows up problems in other parts of the world and transmits them internationally. Before 2008, banker’s said they made the financial system safer by spreading risk through the system, 2008 showed conclusively this was not the case.

    In 1998, a small firm collapsed and posed a systemic risk to the US and Western financial system, Long Term Capital Management (LTCM). A small firm used the incredible leverage available through complex derivatives to place bets on activity round the world. It’s poor judgement on the situation in Russia, turned this small firm into a financial black hole and initially everyone was terrified at the extent of possible losses. In the end the problem was manageable with a huge bailout.

    In 1999, the decision was made not to regulate derivatives.

    In 2008, for the first time ever a housing bust in one nation spread out across the world through complex derivatives. Again a financial black hole had been created and everyone was terrified the Western financial system would collapse. In the end the problem was manageable with unprecedented bailouts across the world.

    James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.

    Losses from sub-prime – less than $300 billion
    With derivative amplification – over $6 trillion

    Complex derivatives multiplied losses by twenty times and spread them around the world.

    The complex derivatives market that creates potential financial black holes has grown considerably since then.

    The visible markets around the world have already lost over 1 trillion in value. The loss multiplier of complex derivatives is yet unknown. It is only when the dark star, the financial black hole, blinks into existence and everything starts getting sucked in will we realise the danger.

    Third time lucky for these financial weapons of mass destruction?

    (In 2002, Warren Buffett used the term financial weapons of mass destruction to describe complex derivatives

    • walter map says:

      “In 1999, the decision was made not to regulate derivatives.”

      Thereby consigning civilization to certain death by terminal corruption.

      Pity the young, for they have no future.

      “It’s puzzling why bankers have come up with these new ways to lose money when the old ways were working so well.”

  2. Keith says:

    When banks reveal losses, it means the losses have got to big to hide.

    When the board of a bank don’t take bonuses, the end of the world is nigh.

    • Vespa P200E says:

      It’s called the good ol hide the NPL (non performing loan) weenies. And forgo the for granted bankster bonuses too?

      Wonder how DB is reporting the loans/debts to the PIIGS and especially Italy, Spain and yeah Greece.

      I abhor to even ask about the web of the CDOs and counterparty risks many times over the balance sheet…

      Alas – IMF, World Bank and ObaMao/Janet just do not have the wherewithal to help Angie and Mario but I suppose Mario can resort to outright printing Euro or something.

      Folks this all sounds worse than the Lehman/BS moments and we no longer have AIG to pay everyone off.

      • Yoshua says:

        European banks have $1 trillion in non performing loans today… that we know of. :)

  3. Al Tinfoil says:

    “These CoCo bonds, as they’re called, are special: The bank can call them after a certain date but doesn’t have to redeem them; annual coupon payments are contingent on the bank’s ability to stay above certain cash and capital requirements, as specified by German and European banking regulations; and investors cannot call a default if the bank fails to make the coupon payment.”

    Such a Deal!!!! “Special bonds”, issued by a bank that just announced big losses last quarter and cancelled bonuses, to shore up a looming hole in their capital reserve account. And issued on such attractive terms!!
    Where can I sign up to buy these before the market snaps them all up??!!!!
    Then again, maybe I should wait until they are trading at 10 cents on the dollar. Then I could trade them for Puerto Rico bonds.

  4. Vespa P200E says:

    No worries as DB is the stalwart of Germany (and EU) and Mario will surely prop it up/bail it out somehow as its downfall is the mother of all bank crisis since days of Weimar Republic which ushered in the ultra right wing Hitler to power.

    Next up is more Muslim invasions thanks to Frau Angie’s open arms and rise of the right wing political forces to protect the Christian and European “values”. Who would have thought EU will be taken over by hordes of unarmed trojan horses with migrants being mostly young men from ME and North Africa?

    We learn history so as not to repeat it.

    • Toddy says:

      No, no, we learn history so as to repeat mistakes again and again because it only takes 1 generation before people forget what happened last time around.

      And so we turn, turn, turn 360 degrees and face the same fate of generations before: calamity, chaos, feudalism, war and violence…

      “Good night, and good luck”

      • Vespa P200E says:

        Yeah guess it’s different this time or something. No wonder there are still suckers for Ponzi scheme too.

        Keep calm and carry on

      • Markar says:

        Don’t forget, that “history” is written by the victors.
        DB=Dead Bank

        • d says:

          No Victors propaganda is written by victors. It is not History.

          This is why History always get revised, at a later date.

          Unfortunately, the current leftist, and Communist revisers, are worse than the propagandists victors.

          So of late, much mess has been made in the field of history, making it even harder. For future historians to filter the truth, from the propaganda.

        • Keith says:

          What numpty came up with trickledown?

          Today’s ideal is un-regulated, trickledown Capitalism,

          We had un-regulated, trickledown Capitalism in the UK in the 19th Century.

          We know what it looks like.

          1) Those at the top were very wealthy
          2) Those lower down lived in grinding poverty, paid just enough to keep them alive to work with as little time off as possible.
          3) Slavery
          4) Child Labour

          Immense wealth at the top with nothing trickling down, just like today.

          This is what Capitalism maximized for profit looks like.

          Labour costs are reduced to the absolute minimum to maximise profit.

          (The majority got a larger slice of the pie through organised Labour movements.)

          The beginnings of regulation to deal with the wealthy UK businessman seeking to maximise profit, the abolition of slavery and child labour.

          Where regulation is lax today?
          Apple factories with suicide nets in China.

          The modern business person chases around the world to find the poorest nation with the laxest regulations so they can exploit these people in the same way they used to exploit the citizens of their own nations two hundred years ago.

          Labour costs are reduced to the absolute minimum to maximise profit.

          A leopard never changes its spots.

          Capitalism in its natural state does not create much demand.
          Capitalism in its natural state sucks everything up to the top.

        • Akakai_Akaikavitch says:

          History is a lie agreed upon.

          – Napoleon Bonaparte

    • Keith says:

      Einstein’s definition of madness “Doing the same thing again and again and expecting to get a different result”.

      1920s/2000s – high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase

      1929/2008 – Wall Street crash

      1930s/2010s – Global recession, currency wars, rising nationalism and extremism.

      • Vespa P200E says:

        Late 1930s/? – Trade wars (soon – check) and world war (look at middle east power keg with ISIS calling West actions as 2nd Crusade and how WW I was started over mere assassination)

        BTW – One of the reason Japanese attacked US was due to oil embargo by US which at the time was #1 oil exporter.

        Banksters may even come out ahead and make lot of underwriting fees by loaning money to sovereign governments.

  5. Jonas says:

    I think it’s a bit unfair Deutsche Bank gets singled out for all the fines, and that it now seeks to ‘voluntarily’ withdraw from certain markets, thereby ceding the space to London and new York outfits. Other banks and institutions do far worse things than Deutsche and go away Scott free. Reminds me a bit of the subprime crisis, where European banks and investors were sold these derivatives by the Americans, then never saw a penny back.

    Then again, Germany lost ww2, they can’t complain. I’m convinced that on some level this still matters. During college, in an excellent history class, I learned of a study claiming that it takes five generations for the effects of a war to truly become ‘history’. Until then, I think Germany has to act a bit like a sacrificial sheep when times get tough for some favorite Anglo industry. Judging from that, there are a lot of stressed banks in our country who would desperately welcome a bit of extra business liberated from DB. This is just a cynical hunch, but in no way does it augur well for any party involved.

    • MC says:

      The big problem is Deutsche Bank, differently from other banks, is comically inept at avoiding scandals. They believe their sheer size and the German government are all they need. And they learned the hard way it is not enough.
      Last year UBS was caught in a gold pricing scandal in Zurich. Due to the peculiarities of Swiss law they can avoid most of the consequences by turning Queen’s evidence, which they are eagerly doing. Swiss persecutors have said they’ll have a case ready by March but they’ve already named DB as one of the banks that will be dragged in front of the court and slapped with yet another massive fine.
      DB did nothing to mitigate this: they could have turned Queen’s evidence as well over the past couple of months or at very least promised to do so but preferred smashing hard disks and shredding documents instead. Needless to say those smashed hard disks have been noticed and taken as proof DB doesn’t intend to cooperate.
      Get the check book ready, Helmut.

      Not unlike other giant German corporations such as VAG and Siemens, Deutsche Bank seems possessed by what can only be described as the very definition of hubris. All giant corporations are guilty of it, but German ones seem particularly prone to living it to the fullest.
      When an American corporation is caught in a scandal, its first reaction is usually to attempt buying off everybody in sight and put their legal team in overdrive mode.
      When a Japanese corporation is caught in a scandal, its first reaction is to present a sobbing face and some heads on a platter.
      But when a German corporation is caught in a scandal, the first reaction is “We cannot do wrong so don’t bother us with it”.
      We often speak, and rightly so, of how deep the connections between American and Japanese corporations and their governments are, but we often forget German corporations have even deeper connections, which often extend to intricate ownership patterns. German corporations are always sure Berlin (like Bonn back in the FDR days) will bail them out.

      This “we cannot do no wrong” mentality extends to every aspect of German corporate.
      When you go to a Japanese corporation to show them a problem due to bad part design or poor materials choice, their answer is invariably the same “This is very strange. We don’t know how it could have happened but thanks for bringing this to our attention”. Then they may do nothing about it but at least they use some professional courtesy.
      But when you go to a German corporation with the same problem their answer is invariably “Never heard of it. You caused it so don’t bother us with it”. This rotten attitude has cost them billions over the years in lawsuits and expensive recall campaigns which could have been avoided simply by listening to customers. German corporate is always 100% sure their banks and governments will cover their mistakes, no matter how idiotic, so they just flat out don’t care.

      • Vespa P200E says:

        Good examples are VW and their initial do no wrong arrogance on diesel fiasco and Siemens bribery scandal. As Audi diesel owner I just can’t believe powers at be thought they can get away with it for so long all over the world.

        Worked for Siemens Medical subsidiary (closed after dumb investment at big loss) and Swiss big pharma and their aloofness certainly sets them apart.

        • Akakai_Akaikavitch says:

          Didn’t they make an MRI? What will happen to all the equipment they sold that has to be serviced?

    • d says:

      “I think it’s a bit unfair Deutsche Bank gets singled out for all the fines, and that it now seeks to ‘voluntarily’ withdraw from certain markets, thereby ceding the space to London and new York outfits.”

      There has to be a “sacrifice” in Northern Europe, so the sick club med and greek banks can be, Eliminated.

      Looks like Deutsche who got to over exposed to sub prime, and bad behaviors, has drawn the short straw.

      Consolidation is required in the European Banking landscape. and a lot of other issues will be resolved in this euro wide.

      All those bail in regulations are there for a reason.

      The club med states wont clean out the Zombies, then Draggi will.

      He has learnt enough from Japan to know, the Zombies, must go.

      As long as they dont loose control of it it should not be an issue.

    • Alki9 says:

      You may feel like the world is ganging up on Germany but much of its problems are self inflicted. No one forced Germany to accept a million refugees from the Middle East. Frau Merkel takes all the credit there. They could have said “No” or sharply limit the number of refugees like the U.S. is doing. The way I see it, Germany has been prospering at the expense of other EU nations for 20 years with an artificially low currency that has made their exports explode worldwide. Now it’s time for a little payback. So I wont shed a tear for Germany. Besides, Draghi can just include these CoCo bonds in his QE program and problem solved.

  6. shaba says:

    So at what price does the market turn on DB? It’s already down a lot….This reminds me of the market turning on Lehmann in Sorkin’s book.

    • d says:

      Very similar situation. Another big lawsuit coming, ugly everywhere.

      Plus no payout to the boys this year.

      The ECB needs a “Crisis” so it can use its bail in regs and roll up a bunch of those club med Zombies and near zombies. Wiping out a huge amount of debt at not cost to it or the tax payer.

      IMHO DB is to be the northern Sacrifical lamb and is a dead man walking .

  7. Petunia says:

    Convertible bonds that don’t convert and coupons that don’t have to be paid. Financial engineering at its finest. How is this not just plain fraud?

    Why do you people still have money in the markets?

    • d says:

      Its not fraud as its in the terms and conditions in black and white.

      “Caveat Emptor”

      Antbody who buys under those terms now needs their head read unless they buy @ BIG discount with a guaranteed pass on for a margin. Then the same can be said of their buyer.

      • Petunia says:

        There are two problems with creating this garbage. First it contaminates/undermines the integrity of the rest of the market. Where there is some garbage, there is probably more. Secondly, it really is fraud because it lands up in pension funds where the real investors have no idea they are being scammed.

        • d says:

          “Secondly, it really is fraud because it lands up in pension funds where the real investors have no idea they are being scammed.”

          But not a fraud perpetrated by DB.

          You are beating DB for the actions of fund managers, and brokers, beat the correct target or nobody.

  8. Dave Mac says:

    Looks like DB is in deep scheise.

    Will it even still be around in 2017?

  9. billyboy says:

    Amazing. Meanwhile DB is still foreclosing on thousands of American homes willy with there hired thugs at Ocwen and other dogs. They seen to have plenty of money for their Scumbag attorneys over here, and are illegally stealing American’s home without legal standing.

  10. Am I going to lose my 153.45 euros in my german bank account when they do a bail-in?

    • Wolf Richter says:

      No. They’re covered by deposit insurance. Besides, it looks like investors (stockholders and unsecured bondholders) are getting “bailed in” first, as it should be.

      But eventually you might have to start paying negative interest on that deposit.


  11. What’s not to like? Derivatives are simply insurance policies where premiums are paid forever, and defaults “never” occur. Like the derivative committee said, “We decide when we pay.” It’s all kept quiet until the premium payers get sick of being suckered. It’s just another case of lyin’ and stealin’ being rewarded.

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