December 23, 2016 / 11:56 AM / 10 months ago

Deutsche bonds spike on DOJ settlement

LONDON, Dec 23 (IFR) - Deutsche Bank’s riskiest bonds jumped on Friday after the lender said it would pay US$7.2bn in a settlement related to pre-crisis sales of mortgage-backed securities that is around half the size feared.

The German bank’s Additional Tier 1 bonds, the riskiest form of debt that banks can sell, have been under periodic bouts of pressure since mid-September, when the US Department of Justice said it would be asking for as much as US$14bn.

Deutsche’s 6% 1.75bn AT1 bonds callable in 2022 jumped from 82 cash price to 86 on Friday morning, according to Tradeweb. Those bonds had fallen to around 70 in late September.

The bank will pay the DOJ a civil monetary penalty of US$3.1bn and provide US$4.1bn of consumer relief in the US.

The potential size of the fine had raised concerns that Deutsche would not have enough cash set aside to pay.

CreditSights analysts, who had estimated Deutsche had existing reserves against the DOJ claim of just 2bn-3bn, said in a note on Friday that the US$7.2bn figure “comes as a relief”.

Deutsche will take a fresh provision of around 1.1bn equivalent this quarter, which the analysts said would leave ample Available Distributable Items to pay the AT1 coupon of around 350m in April.

“The uncertainty is not over yet because of the questions over impairment charges or other possible losses,” they wrote, “so we still see better risk-adjusted value elsewhere in the AT1 universe.”

This uncertainty includes potential fines for suspicious Russian equities trades and alleged violations of US sanctions, which are still hanging over the German lender.

“[Deutsche Bank] may settle the $10bn Russian ”mirror trades“ case before it closes its 2016 accounts in early March 2017, as communicated by the bank itself,” said BNP Paribas analysts in a note on Friday.

“The impact of this second settlement may still be included in the 2016 financials. This means that, while the payment of AT1 coupons is more likely after the positive agreement with the DoJ, it is still not guaranteed.”

Credit Suisse has agreed also to pay a US$5.3bn fine for similar violations. The Swiss Bank will pay a civil penalty of $2.48bn and provide consumer relief of $2.8bn over five years.

Credit Suisse’s 5.75% 1.25bn AT1 bonds callable in 2020 were trading flat on Friday at 109.30, according to Tradeweb.

Reporting by Tom Porter; editing by Sudip Roy

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