Deutsche Bank's Woes Threaten CoCo Coupons, CreditSights Saysby
Bank is likely to make payment in 2016 coupons on CoCos
Bonds, CDS, stock hurt by questions on this year's payouts
Deutsche Bank AG may struggle to pay coupons on its riskiest bonds next year if operating results disappoint or litigation costs are higher than expected, according to analysts at CreditSights Inc. The bank said it has sufficient capacity this year and next.
Bonds and stock of Germany’s largest bank have plunged this year, with the shares shedding 39 percent of their value and its contingent convertible bonds -- known as CoCos, or additional Tier 1 securities -- turning in a similar performance. The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 438 basis points, a four-year high, from 187.
“While we are confident about 2016 coupons, we are less so about coupon payments in 2017,” CreditSights analyst Simon Adamson wrote in a note to clients today. Deutsche Bank will do “everything in its power to pay them” because it will need to issue such bonds in the future, he said.
The question for CoCo investors and holders of trust preferred securities is whether Deutsche Bank has sufficient “available distributable items,” a measure based on audited unconsolidated accounts calculated under German accounting principles, to make the payments, according to Adamson. Given that there are reserves available to make up any shortfall that might prevent payouts, “we would be surprised” if Deutsche Bank didn’t pay coupons on its CoCos this year, which are determined by its 2015 performance, he said.
At the end of 2014, the latest figure available, Deutsche Bank had 2.87 billion euros ($3.2 billion) of ADIs, according to a presentation. The company also has 2.93 billion euros in a general reserve that could be used to top up ADI, as well as a 5.5 billion-euro “blocked amount” that was excluded from the ADI calculation and could probably be unblocked if necessary, according to CreditSights.
While failure to pay interest would be tantamount to default for most of Deutsche Bank’s debt securities, coupon payments on its CoCos and trust preferred securities are optional. The total payment due this year is about 700 million euros, according to Adamson.
The Frankfurt-based lender said in a statement Monday that its ability to pay is being bolstered by the sale of a stake in Huaxia Bank Co. Deutsche Bank has room to pay about 1 billion euros in 2016, enough to cover about 350 million euros in additional Tier 1 coupons due in April, it said. The estimated payment capacity for 2017 is about 4.3 billion euros, excluding any impact from full-year operating results, it said.
Issues hitting investor sentiment about the outlook for Deutsche Bank include a lengthy restructuring process that will be costly to see through, “unpredictable” litigation costs that are likely to remain high, and earnings under pressure from a difficult market, Adamson said. Against that, the company has “reasonably comfortable” capital ratios and has insisted it will pay coupons on its securities this year.
“The scale of the sell-off in Deutsche Bank’s bonds, CDS and shares since the turn of the year has been extraordinary,” Adamson said. “It is impossible to predict with any certainty, so a question mark will continue to hang over 2017 AT1 coupons.”