Risky Bank Bonds That Sparked Market Selloff Recovering to Par

  • Deutsche Bank AT1s climb to highest levels in almost two years
  • UniCredit’s notes rise above 100% of face value from about 70%

The riskiest bonds of banks at the center of last year’s panic in European financial markets are trading at about full value for the first time in almost two years.

Deutsche Bank AG’s 1.75 billion euros ($1.9 billion) of additional Tier 1 bonds increased to 99.6 cents on the euro on Monday, the highest since August 2015, according to data compiled by Bloomberg. UniCredit SpA’s 1 billion euros of 6.75 percent notes rose above 100 cents last week from as low as 70 cents last year, the data show.

Investors are betting that the biggest German and Italian lenders will be able to pay coupons on AT1 securities or buy them back after the banks raised a combined 21 billion euros from shareholders. Concerns that rising legal costs, soured loans and shortfalls in the banks’ financial reserves might prevent them from making payments sparked an industrywide selloff last year.

“They’ve stabilized the ship,” said Sebastiano Pirro, an asset manager at London-based Algebris Investments, which oversees about $6 billion and has bought both banks’ AT1s. “They understood they had a problem that was becoming a funding problem.”

Capital Raising

Deutsche Bank raised 8 billion euros from shareholders in April, following UniCredit’s 13 billion euro capital increase.

The German lender’s $1.25 billion of 6.25 percent notes rose to 99 cents on Monday from about 75 cents in November, according to data compiled by Bloomberg. Its $1.5 billion of 7.5 percent bonds and 650 million pounds ($843 million) of 7.125 percent securities, along with UniCredit’s $1.25 billion of 8 percent notes, have already surpassed 100 percent of face value, the data show.

Andreas Held said he has used the rally to reduce AT1 investments at Deka Investment GmbH, which manages 160 billion euros. The riskiest notes still have value compared to other assets, including high-yield bonds, he said.

Investor concerns are now focused on the riskiest bonds of other southern European lenders, though problems there are unlikely to impact the market as much as Deutsche Bank and UniCredit, Pirro said.

Banco Popular Espanol SA’s 750 million euros of 8.25 percent notes fell to the lowest since June after the unprofitable Spanish lender posted a bigger-than-expected loss on Friday, according to data compiled by Bloomberg. The notes were little changed at 80 cents on the euro on Monday.

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