Pimco’s Idea for Deutsche Bank Bonuses: Pay in Risky BondsBy and
Pimco, Algebris says bank should pay staff with AT1 notes
AT1 notes are first to take losses if bank runs into trouble
As Deutsche Bank AG Chief Executive Officer John Cryan explores alternatives to paying its staff bonuses in cash, two of the lender’s creditors have an idea: pay them with a risky type of bond that would be first to take losses if the bank runs into trouble.
Europe’s biggest investment bank is weighing compensation alternatives as it seeks to boost capital buffers and shore up investor confidence, people familiar with the matter said on Tuesday. Money managers at Pacific Investment Management Co. and Algebris Investments think it should pay with so-called additional Tier 1 bonds, that can skip interest payments and be written off or converted into equity if a bank burns through financial reserves.
Employees should “eat their own cooking,” said Ivan Vatchkov, the chief investment officer for Asia at Algebris, a fund that focuses on bank capital and has bought Deutsche Bank’s AT1s. Giving bonds would help align interests with debt investors, according to Philippe Bodereau, global head of financial research at Pimco, who says it’s a good idea in general for European banks.
Deutsche Bank’s $5.5 billion of AT1 notes have come under pressure this year as fixed-income investors fret about whether the relatively high yields compensate for the risk of losses. European banks have sold $117 billion of the bonds to money managers since 2013, and Swiss lenders UBS Group AG and Credit Suisse Group AG were the first to pay staff with the securities.
Don Hunter, a spokesman for Deutsche Bank in London, declined to comment on whether the lender should pay staff bonuses with the notes.
“It’s good for staff too -- the instruments pay big coupons -- and would have been a better investment than stock for many of them,” Pimco’s Bodereau said. UBS “sets the benchmark that other banks should follow.”
UBS awarded its highest-earning staff with more than 500 million Swiss francs ($505 million) of AT1s last year, according to its annual report. CEO Sergio Ermotti received 3.45 million Swiss francs of the notes last year. Credit Suisse paid 226 million Swiss francs of AT1s to employees in 2015, according to its annual report.
Cryan said in March that the bonds were “very expensive” and hard to justify after a market-wide selloff. Even so, it may need to issue as much as $7 billion of them by 2020, according to estimates from Bloomberg Intelligence analysts. The bank hasn’t sold new AT1s in almost two years.
Deutsche Bank awarded staff 2.4 billion euros ($2.6 billion) of bonuses for 2015, according to the bank’s annual report. More than half of bonuses were paid out immediately, while 49 percent was deferred stock and cash.
The German lender is considering giving some bankers shares in the non-core unit and replacing the cash component of variable compensation with more Deutsche Bank stock, said people familiar with the matter, who asked not to be identified because the deliberations are private.