“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
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.