Deutsche Bank's Big Shareholder Heavily Financed Its New Stake
May 10 2017 - 2:10PM
Dow Jones News
By Jenny Strasburg
Deutsche Bank AG's new biggest shareholder, Chinese conglomerate
HNA Group, used more than EUR2.6 billion ($2.8 billion) in
financing to help buy its nearly 10% stake in the German lender and
protect itself against potential losses on the position.
Bankers and analysts familiar with such transactions said the
disclosures suggest a heavier reliance on financing than they would
consider typical for most large investors building a similar
holding. Some of them said that investment banks have been
competing fiercely for HNA's business as it goes on a global buying
spree.
In February, Deutsche Bank disclosed for the first time that HNA
had a major stake, of about 3%. HNA then began a series of
transactions that more than tripled its stake, to 9.92%. The
purchases catapulted HNA to the top of the lender's shareholder
roster. Bankers and investors have cited the HNA purchases as a
show of strength in the bank.
Yet the filing, made May 2 with the Securities and Exchange
Commission, show HNA didn't just shell out cash to buy the new
shares. It tapped more than EUR2.6 billion in financing, mostly
from UBS Group AG. With that money, it bought shares and
established derivatives positions that would compensate it if
Deutsche Bank's share price fell while sacrificing some gains if it
rose.
The derivatives structure, known as a collar, limits HNA's risk
-- and its potential reward.
HNA's 204.7 million shares were worth roughly EUR3.6 billion at
Wednesday's EUR17.49 share price. Deutsche Bank shares are up a
little more than 1% this year and have almost doubled from the
multiyear lows they reached in the fall. Most of HNA's new shares
were bought in late April for EUR16.70, including fees, according
to the filing.
Its stake is held through Austrian asset manager C-Quadrat
Investment AG, which manages HNA's Deutsche Bank investment,
according to people familiar with the matter and the U.S.
regulatory filing.
Including brokerage and financing fees, the filing said HNA's
share purchases cost EUR3.4 billion. Roughly 32 million of the
shares came at EUR11.65, the discounted price at which Deutsche
Bank sold rights in its recent $8.5 billion capital increase.
Spokesmen for HNA and C-Quadrat declined to comment. A Deutsche
Bank spokeswoman also declined to comment on the HNA
transactions.
The limited disclosures don't reveal how much cash HNA put up to
become Deutsche Bank's biggest shareholder. Bankers and others said
HNA's cash outlay could have been less than EUR1 billion based on
the disclosures, but they emphasized that is an estimate.
The investor, according to the regulatory filing, built up its
Deutsche Bank stake based on a belief that the shares "are
substantially undervalued and are an attractive investment."
UBS provided most of the financing, including one chunk of
EUR2.1 billion plus part of a EUR473 million loan with ICBC
Standard Bank PLC, according to the filing. The banks declined to
comment.
An undisclosed portion of the EUR2.1 billion from UBS was used
to finance two collars, the filing said. The trades use options to
limit the investor's risk of losses if shares fall below a certain
level -- in this case EUR15 and EUR16.70 -- when the options
contracts expire in 2018 and 2019.
In exchange for that protection, HNA agreed in the two
transactions to give up profits if the share price exceeds EUR20
and EUR21.
Collars involve offsetting cash flows -- HNA pays UBS for
protection in case of low prices, and UBS pays HNA for the right to
profit on high prices -- and thus aren't comparatively expensive.
That suggests the bulk of the EUR2.1 billion UBS loan likely went
to actually purchasing shares, say people familiar with such
transactions.
Collar transactions aren't uncommon as hedges against risks in
big shareholdings. But other investors could see the narrow range
of the collar on HNA's Deutsche Bank investment as indicating
relatively low expectations for the shares and also low risk
tolerance, some financiers said.
C-Quadrat's founder, Alexander Schütz, has been nominated to
join Deutsche Bank's supervisory board next week, when it holds its
annual shareholders meeting.
Write to Jenny Strasburg at jenny.strasburg@wsj.com
(END) Dow Jones Newswires
May 10, 2017 13:55 ET (17:55 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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