DB Deutsche Bank Aktiengesellschaft

   (FROM THE WALL STREET JOURNAL 2/11/16) 
   By Christopher Whittall and Jenny Strasburg 

The news that Deutsche Bank AG is considering buying back a chunk of its own debt has sparked a rally in European banking shares, which had taken a beating this year. We step through what Germany's largest lender by assets is contemplating and why.

Why is Deutsche Bank in the headlines?

It is troubled. Deutsche Bank stock was down 34% year to date through early afternoon Wednesday. Long-standing worries that the bank is too thinly capitalized had been exacerbated by weak financial results, uncertainty about a restructuring of the bank, and market moves beyond the bank's control. The worries spread to bond prices, which are usually more resilient than stocks, with the bank's debt selling off sharply. Fears that Deutsche may not be able to pay an interest payment due in April on one of its junior bonds -- contingent convertible debt, known as CoCos -- further fanned the flames.

What has it done?

Several things. Late Monday, the bank released a rare statement saying it had enough funds to make that bond payment and expects to be able to make 2017 payments as well. Deutsche is considering buying back several billion euros of its debt, a move aimed at shoring up its bonds. Separately, Deutsche's new co-chief executive, John Cryan, told employees the bank is "rock solid."

How have the moves been received?

On Wednesday, Deutsche's shares rose 10%. Its bonds also rallied. The cost of insuring against a default for five years on Deutsche senior debt using credit-default swaps fell $28,000, to $225,000 a year, according to Markit.

What's the likely plan?

A debt buyback would likely focus on the bank's senior debt, not its CoCos. The bank could either start purchasing its own bonds on the open market or announce a formal tender. In the latter case, it would announce a pool of bonds trading below face value that it intends to buy at a set price, most likely above market levels to tempt investors to participate.

Why buy its own bonds?

To show strength. One goal would be lowering its funding costs, which are tied to its credit-default-swaps spread. Deutsche has a large derivatives book. A lower swaps spread typically makes derivatives positions less costly to fund and would reassure other banks that trade with Deutsche. The bank also needs to hold on to corporate clients, who might otherwise be tempted to move deposits and business elsewhere. By doing a buyback, Deutsche could signal to investors that the market is undervaluing these securities. It also would underscore that Deutsche has access to the cash it needs to take such a step.

So, is the crisis over?

Hardly. Some pressure has been relieved, but fundamental issues remain, particularly with uncertainty over broader markets that are key to Deutsche's bottom line. Investors have been concerned it won't be able to cut costs adequately and meet regulatory requirements to boost its capital levels. Buying back a few billions euros of its debt at a discount would increase capital levels marginally and shrink its balance sheet, boosting its capital ratios. But questions about the bank's ability to generate profits would remain. The road ahead is likely to be long and rocky.

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Paul Davis contributed to this article.

(END) Dow Jones Newswires

February 11, 2016 02:47 ET (07:47 GMT)

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