Yesterday shares of Deutsche Bank hit their lowest level ever over fears about the ability of the German Bank to meet obligations on its riskiest bonds. Markets are questioning the solvency of the bank to meet its coupon obligations. Only today the bank jumped 14% after the CEO said he is planning a buyback for DB bonds.
Markets believe that the bank would need new fresh capital but the CEO John Cryan said that the bank is solid and that has enough capital to meet future obligations. However, fears about huge legal expenses, fees or defaults might hamper the ability of the bank to pay dividends or coupons.
The reaction of the markets has been pretty harsh in recent days; CDS took off from 90 basis points to 190 basis points (for senior debt). The Contingent Convertible bonds, which offer higher interest rates than normal bonds are now traded at 77% of their nominal value. Also, Deutsche Bank, which is very active in the derivative market, has got toxic assets for about 30B euros in its balance sheet. Using also a leverage of about 1 to 25 the scenario gets more problematic. The bank has now a capitalization of 20 billion euros, one third of its book value, just consider that the biggest Italian bank Intesa San Paolo is worth more than double.
To recover from this obscure spiral DB said it would consider to buyback some of its own bonds, according to the CEO this move would demonstrate that the bank is well capitalized and that the value of its bonds is higher than the current market price. However, the bank said nothing about the CoCo bonds (5B euros in 2014), it might sound like a sign that the bank does not trust this particular financial instrument. Perhaps, they are too risky also for the bank that issued them.
Just think for a moment how companies would reassure markets, buying back its safest bonds or its riskiest ones? Apparently, DB is buying back its safest ones and while I am writing CDS on its junior debt are trading at about 455 basis points.