Deutsche Bank's Riskiest Bonds Sink to Record Low on Coupon Risk
by
Tom Beardsworth
October 8, 2015 — 2:31 PM CEST
Deutsche Bank AG’s additional Tier 1 notes, the riskiest form of bank debt, fell to record lows as a potential dividend cut stoked concerns about coupon payments and capital levels.
Prices dropped as much as three percentage points after the lender reported a preliminary 6.2 billion-euro ($7 billion) loss for the third quarter and said it may skip a dividend for the first time since at least 1957. Capital shortages could also eventually lead to the bank missing coupon payments on additional Tier 1 notes, said Bill Blain, a strategist at Mint Partners.
“There has always been a concern at the back of investors’ minds that a bank may use AT1s as emergency capital,” he said. “Bearing in mind Deutsche’s history, it’s a possibility for them more than for others.”
The Frankfurt-based lender probably has the lowest coupon cover among all additional Tier 1 issuers,
according to CreditSights Ltd. It paid out more than 1 billion euros in dividends in the first half of 2015, while
so-called available distributable items were just 2.87 billion euros in December, the research company said. The distributable-items measure limits how much German banks can give shareholders and bondholders.
Still, Deutsche Bank’s attitude toward coupon payments on additional Tier 1 notes is probably “very different” from that regarding dividends due to the lender’s need to sell more of the securities to raise capital, CreditSights analyst Simon Adamson wrote in a note to clients on Thursday. Skipping an AT1 coupon payment “would be disastrous” to future sales, he wrote.
Payments on additional Tier 1 notes aren’t guaranteed. The securities can also be written down or converted into equity if a bank’s capital falls below a specified level.
Writedowns, Provisions
Deutsche Bank posted the preliminary loss after writing down its two largest units and increasing reserves for legal costs. It expects to report a Common Equity Tier 1 ratio of about 11 percent, Co-Chief Executive Officer John Cryan said in a staff memo published on the bank’s
website. The Additional Tier 1 bonds will be automatically bailed in if the ratio falls below 5.125 percent.
The lender’s 650 million pounds ($995 million) of 7.125 percent additional Tier 1 notes were quoted as low as 91 pence on Thursday, according to data compiled by Bloomberg. They rebounded to 93 pence as of 1:21 p.m. in London. The bank’s shares were little changed at 25.565 euros in Frankfurt, erasing an earlier decline of as much as 3.6 percent.