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[BERLIN] Deutsche Bank plans to buy back about US$5.4 billion of bonds, including some it issued barely a month ago, to reverse an investor stampede away from its stock and debt.
The buyback announcement, which helped send the shares of Germany's biggest lender up 12 per cent Friday, came at the end of a disastrous week for banks. The Stoxx Europe 600 Banks Index is down 25 per cent this year, and measures of risk on banks and insurers in Europe hit the highest since at least 2013. Investors are concerned banks' bottom lines will suffer amid falling oil prices, China's economic slowdown, negative interest rates and a pullback by some sovereign-wealth funds.
In the US, JPMorgan Chase Chairman Jamie Dimon spent US$26.6 million of his own money to buy shares of his bank, a regulatory filing showed Thursday, joining a group of at least four share-purchasing bank top executives this year. Deutsche Bank is down 32 per cent this year and Credit Suisse Group shares plunged to the lowest level in a generation on Thursday.
"This is a tool Deutsche Bank can use to reduce the panic," said Roger Francis, an analyst at Mizuho International in London. "It doesn't really address the underlying concern that people have about the bank. They need earnings to pay dividends and subordinated bond coupons, and that's where the question marks are."
The move comes just days after Deutsche Bank told investors and staff that it has sufficient funds to pay coupons on its riskiest debt. Co-Chief Executive Officer John Cryan said the bank is "rock solid." Deutsche Bank is seeking to bolster confidence after credit-default swaps insuring its subordinated debt rose to the highest on record, according to data compiled by Bloomberg.
The bank said in a statement on Friday that its "strong liquidity position" allows it to repurchase the senior unsecured notes without any change to its 2016 funding plan. It's offering to buy 3 billion euros (S$4.8 billion) of bonds in the single currency and US$2 billion of dollar notes.
"The bank is using market conditions to buy back these bonds at attractive prices and to cut debt," Chief Financial Officer Marcus Schenck said in a statement on the website. "By buying them back below their issuance value, the bank is making a profit. The bank is also using its financial strength to provide liquidity to bond investors in a difficult market environment."
The bank's 1.75 billion euros of 6 per cent contingent convertible notes redeemable in April 2022 rose 2 cents on the euro to 73 cents, up from a record low of 70 cents on Tuesday, data compiled by Bloomberg show. The banks' riskiest debt was downgraded by Standard & Poor's on Thursday to four per cent contingent convertible notes levels below investment grade.
The cost of insuring the bank's subordinated debt for five years fell 15 basis points on Friday to 493 basis points, after closing in London at the highest level since Bloomberg began tracking the data in 2002. The one-year contracts reached a record high of 551 basis points on Thursday, the data show.
"The market is providing them a great opportunity to buy back their debt," said Anthony Smouha, chief executive officer of Geneva-based Atlanticomnium, which manages the GAM Star Credit Opportunities. "They are still the number one German bank. There is no systemic crisis. They have deposits coming out of their ears."
The offer includes the US$1.75 billion of bonds that the German lender issued just a little more than a month ago, according to the filing. The firms that bought the biggest piece of that offering at 100 cents on the dollar are now being asked to sell them back to the bank at up to 97.3 cents, according to calculations by Bloomberg Intelligence analyst Arnold Kakuda. The securities were quoted at 95.6 cents on the dollar on Thursday.
Deutsche Bank is seeking to buy back bonds due between 2017 and 2026, according to the statement. The majority of the securities being accepted for tender mature within five years."The bonds they've selected are senior bank bonds with generally relatively short maturities," said Gregory Turnbull- Schwartz, an Edinburgh-based fixed-income manager at Kames Capital, which manages about 55 billion pounds (S$111.8 billion).
"It would be a little surprising that this would be seen as such reassurance, when the rules now require significant amounts of liquidity to be held by all European banks."
The Markit iTraxx Europe Subordinated Financial index, a measure of risk, fell 15 basis points to 299 basis points after closing in London on Thursday at an almost three-year high, according to data compiled by Bloomberg.
Since taking over last year, Cryan has been seeking to raise capital buffers and restore investor confidence in a bank battered by rising compliance costs and losses at its securities unit. The lender last month posted a net loss of 6.8 billion euros for 2015, its first annual shortfall since 2008.
"It's quite a smart move," Christopher Wheeler, an analyst at Atlantic Equities, said in an interview on Bloomberg Television on Friday. "What they've done is said 'look, we're going to put our money where our mouth is and we're actually going to announce the transaction which will obviously benefit earnings.' It's going to boost their capital as well as their shareholders' funds."