By Alex Chambers and Helene Durand
LONDON, Feb 12 (IFR) - Deutsche Bank’s offer to buy back 3bn and US$2bn of senior unsecured debt certainly helped soothe the markets on Friday, but investors were less sure about the move’s long-term impact.
The bank’s shares gained almost 12% on the day while its bonds also traded up on the announcement that a liability management exercise was on the way. The announcement confirmed a Financial Times report earlier in the week that a buyback was on the cards.
The recovery in the prices of its securities was welcome news for the German lender, which has suffered through a tumultuous few weeks as its stock plunged to multi-year lows and its Additional Tier 1 notes came under pressure.
The market has been worried about Deutsche’s ability to pay coupons on those notes, and it was unclear if the buyback would resolve the concerns about the bank’s ultimate capital strength.
“The buyback seems to have had a positive impact on the market, so we should all appreciate it from that point of view,” Gregory Turnbull-Schwartz, investment manager for fixed income at Kames Capital told IFR.
“I don’t think it will have a long-lasting effect, however,” he said.
“If the aim was to settle the market’s nerves around their ability to pay Additional Tier 1 coupons, it won’t take long for people to realise that it bears no relation to what they were worried about.”
Doubts about Deutsche’s ability to pay coupons on its AT1 debt have escalated in recent months and reached fever pitch after the bank announced a record 6.8bn loss.
Standard & Poor’s downgraded the bank’s Tier 1 debt one notch to B+ from BB- on Thursday evening, citing its reduced Available Distributable Items under German accounting rules, which could affect its capacity to pay interest on Tier 1 and perp Tier 2.
Analysts at Citigroup said on Friday that, while the buyback would address concerns around market fears and the damage to counterparty confidence, issues still remained.
“A longer-term feedback loop still exists,” they wrote.
“Deutsche needs to raise capital, in our view. It may choose to wait until litigation issues have been resolved, but the further the share price falls, the more dilutive a capital raise becomes. The only alternative is to cut the balance sheet further, which would put even more pressure on earnings.”
Bankers’ early assessment of the significance of the buyback was that it would have only a negligible impact on Deutsche’s core equity position of between 3.5bp and 7bp - not including any unwinding of swap positions.
“It’s okay. It’s a reasonable show of their intention, especially if they want to show they have plenty of liquidity,” said one fund manager.
“Whether it settles the market is neither here nor there. Some of the bonds they are targeting are very short.”
Banks bought large stocks of subordinated debt at deep discounts to par during the financial crisis, enabling them to create core equity Tier 1.
However, capital generation from senior debt buybacks is typically minimal - and perhaps even more so in the case of Deutsche, as the exercise was leaked ahead of time.
Among the bonds Deutsche is buying back is a US$750m 4.1% January 2026 that was sold just over a month ago. That bond, which priced at 200bp over US Treasuries, has widened to 330bp.
One banker said Deutsche looked to be offering a 20bp-25bp premium over where the bonds were trading. (Reporting by Alex Chambers, Helene Durand, Additional reporting by Will Caiger-Smith, Natalie Harrison, Editing by Marc Carnegie)