Deutsche Bank CoCo Ratings Cut by S&P on Earnings Concerns

  • Lender could report loss that threatens ability to pay: S&P
  • Ratings company said it expects bank can make Tier 1 payments

Deutsche Bank AG’s riskiest debt was downgraded by Standard & Poor’s due to concerns that potential losses at Germany’s biggest lender could restrict its ability to pay on the obligations.

S&P reduced the grade on the bank’s Tier 1 securities to B+ from BB-, according to a statement Thursday. The new rating is four levels below investment grade. Perpetual Tier 2 instruments were cut to BB- from BB.

Deutsche Bank’s buffer of available distributable items has contracted and it “could report further unconsolidated losses under German generally accepted accounting principles,” S&P said. Both metrics are used in calculating how much banks can give to investor through optional payments, such as coupons and dividends.

The German lender last month posted its first full-year loss since 2008, and its shares have plunged more than 30 percent this year in Frankfurt trading. The bank may struggle to pay coupons on additional Tier 1 securities in 2017, analysts at CreditSights Inc. wrote this week.

Bank Earnings

The notes, designed to absorb losses and protect European taxpayers from funding bailouts, were created to help troubled banks hang onto cash in times of stress by allowing coupon payments to be skipped without causing a default. The instruments are facing their first test as weak bank earnings and a global market rout raise concerns about banks’ stability and growth.

Renee Calabro, a New York-based spokeswoman for Deutsche Bank, declined to comment.

The lender’s 1.75 billion euros ($2 billion) of 6 percent junior subordinated debt has tumbled to as low as 70 cents on the euro this year from 93 cents on Dec. 31, according to data compiled by Bloomberg. The contingent convertible, or CoCo, bonds rose 1 cent on Friday to 72 cents.

S&P said its “central expectation” was that the bank’s payment capacity for 2017 “should be sufficient to enable continued Tier 1 interest payments.”

Deutsche Bank estimated this week that next year its payment capacity would be about 4.3 billion euros, boosted in part by proceeds from the announced sale of a stake in Huaxia Bank Co. The 2017 estimate is before any effect from 2016 profit or loss.

Credit ratings for Frankfurt-based Deutsche Bank weren’t affected by the cut to the debt, S&P said.