Deutsche Bank AG’s riskiest bonds plummeted after the German lender received a $14 billion claim from the U.S. Justice Department to settle an investigation into the firm’s sale of residential mortgage-backed securities.
The bank’s 1.75 billion euros ($2 billion) of 6 percent additional Tier 1 bonds, the first notes to take losses in a crisis, fell 4 cents to 80 cents on the euro, the biggest intraday-day drop since July 6. The bank’s 650 million pounds ($858 million) of 7.125 percent notes fell 5 pence to 83 pence on the pound, the most since Britain voted to leave the European Union in June.
“They are dropping like a stone,” said Tomas Kinmonth, a credit strategist at ABN Amro Bank NV in Amsterdam. “The fine, even if reduced, could surpass all provisions held by the bank.”
Interest payments on additional Tier 1 bonds can be switched off if a lender runs into trouble and Germany’s biggest bank has the least available distributable funds among banks in Europe, according to CreditSights Ltd. The bank said in March it had 1.1 billion euros available to pay AT1s for the year.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
Deutsche Bank had made 5.5 billion euros of provisions for settlements and fines at the end of June. Losses in excess of that amount could force the bank to skip coupons, said Lloyd Harris, a London-based portfolio manager at Old Mutual Global Investors U.K. Ltd., which manages 27 billion pounds.
“Anything above $10 billion will make things very difficult for them,” he said. “This is unequivocally bad for their AT1s. It hugely increases the potential for a coupon skip.”