The claim from the US Department of Justice sent the price on Deutsche Bank’s €1.75bn coco bond down 6.2 per cent to trade at 78 cents on the euro.
Also known as additional tier one capital, coco bonds take losses when institutions run into trouble and are designed to transfer the risk of a bank failure from taxpayers to investors.
Deutsche Bank’s coco bonds were at the centre of a furious sell-off in both the debt and shares of European banks in February, when concern over complex regulation, weak economic growth and negative interest rates rattled investors. They have traded significantly below par since.
Investors are paying close attention to the impact of any eventual settlement with US authorities on Deutsche Bank’s capital levels. Banks stop making interest payments on coco bonds when their capital level falls to a certain threshold, and the bonds are written down at a lower “trigger”.
Daniel Davies of Frontline Analysts estimates that for the bank to miss a coupon payment on its AT1s it would need to undergo a hit to tier one capital of €7.5bn. Taking into account pre-tax profit and existing litigation reserves, he estimates that this would correspond to a fine of $14bn.
To trigger a writedown on the AT1 securities — an unprecedented event for bonds sold by major banks over recent years — would require a capital hit of €16bn, he estimates.
Deutsche Bank said in a statement that it does not expect to settle the allegations at “anywhere near the number cited,” and that any settlement will be similar to that reached by peers which have done so at “materially lower amounts”
Some investors pointed out that prices for Deutsche Bank’s coco bonds were much more resilient following Friday’s news than when they ditched earlier this year. “This morning there has been some buying from Asia retail — there’s obviously people out there willing to dip in,” said Chris Telfer, a portfolio manager at ECM Asset Management.
“An aspect of why the move hasn’t been as big is positioning — most people have been underweight, a lot of people have had shorts on it, you’re unlikely to be a panic seller here,” he added. “If you’d been in coco bonds February or March time, you’ve probably done your work, so you’re unlikely to jump at this type of headline.”
While the 6 per cent AT1 bond is trading far below par, it is higher than in February, and than its level in mid-August. No major European bank has missed an AT1 coupon payment.
“This was not a security that was priced at 35bp over government bonds,” said Mr Davies of Frontline Analysts. “From start of the year, there has been a group of banks where AT1 were trading at levels that only made sense if you believe they were priced to miss one or more coupons.”
“I don’t think one could say that a DB coupon miss would be a black swan event that came out of the clear blue sky.”
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