Mar 24, 2023
Deutsche Bank Junior Bond Surges as Firm Defies Call Skip Fears
(Bloomberg) -- A tier 2 subordinated bond by Deutsche Bank AG is surging toward face value on Friday after the lender unexpectedly announced its decision to redeem the note early.
The bonds, which mature in 2028, had slumped from just over 98 cents on the dollar right before the Silicon Valley Bank implosion to as low as 90 cents in the aftermath of the Credit Suisse Group AG additional tier 1 wipe out, according to data compiled by Bloomberg.
While pricing had recovered in recent days, it was still indicated at levels of about 94. That suggested a significant probability of Deutsche Bank skipping its call option. The bank didn’t give any further details on the rationale behind the decision. Previous bond redemptions, when unexpected, have helped to restore investor confidence.
The early redemption notice came on the very first day that the lender had the right to announce it. The notes are callable on May 24 and the borrower could have announced a redemption between 30 and 60 days in advance, according to the bond’s terms.
“Deutsche’s decision to redeem (having received all required regulatory approvals) should be a reassuring signal to credit investors,” Autonomous analyst Stuart Graham wrote in a note on Friday.
Deutsche Bank stock was down 12% on Friday, among the biggest losers on Europe’s banking stock index. Default-swaps on the bank’s euro, senior debt surged to the highest since they were introduced in 2019.
Subordinated-debt markets were battered globally by the writedown of $17 billion worth of Credit Suisse’s additional tier 1 bonds amid its emergency takeover by UBS Group AG. International regulators were quick to cast it as a scenario peculiar to the Swiss market and reiterated that normally shareholders would be the first to take a hit.
Tier 2 notes are subordinated debt that ranks below senior bonds but above so-called additional tier 1 bonds, which have been the focus of investor anger after Credit Suisse’s were written off on Sunday. Tier 2 bonds typically only take losses if a bank is no longer viable.
A tier 2 capital note with a contingent convertible structure issued by Credit Suisse a decade ago escaped the wipe out and surged in value earlier this week.
The lender just completed a successful turnaround that has boosted its profitability, though the recent turmoil around banks caused its credit default swaps to rise. Chief Executive Officer Christian Sewing told a conference last week that his decision not to announce a share buyback earlier this year turned out to be a good one given the recent turmoil.
The government-brokered takeover of Credit Suisse by UBS is “no indication” of the state of European banks, Deutsche Bank management board member Fabrizio Campelli said at a conference yesterday.
He also said that the German lender’s retail deposits are “very diversified” and hence don’t have the kind of concentration risk that seems to have persisted at Silicon Valley Bank.
(Updates throughout with details of redemption notice, quote)
©2023 Bloomberg L.P.