By Jenny Strasburg and Christopher Whittall
Deutsche Bank AG said it would buy back $5.4 billion of its
debt, in a move designed to bolster investor confidence in the
German lender's finances and in the value of its securities.
The announcement Friday came at the end of a volatile week for
Deutsche Bank's shares and the broader market for bank stocks,
particularly in Europe.
Deutsche Bank, which is undergoing a broad restructuring program
under new management, has been hit harder than most big peers as
investors have worried about the bank's capital buffers, litigation
costs and the extent of its ability to profit amid market
turmoil.
Banks' stock and bond prices have both suffered in the rout.
Persistent instability in commodity prices, expectations of further
interest-rate drops and other concerns continue to weigh on
banks.
Bond-market investors and others said Friday that Deutsche
Bank's debt repurchase could prove a small price to pay relative to
the lender's large balance sheet, if investors and counterparties,
including other banks and trading partners, are reassured by the
move. But the repurchase might not alleviate deeper concerns about
the bank.
The buyback offer targets senior unsecured debt of as much as
EUR3 billion ($3.4 billion) in euro-denominated securities and $2
billion in U.S. dollar-denominated securities.
Late Thursday, J.P. Morgan Chase & Co. said its chairman and
chief executive, James Dimon, had bought 500,000 of J.P. Morgan's
shares, for $26.6 million. The bank's shares were up 8% in midday
Friday trading.
Deutsche Bank said its public tender offer was effective Friday
for seven days for euro-denominated debt and up to 20 days for U.S.
dollar-denominated securities. It targets bonds that mature between
May 2017 and January 2026.
The buyback "certainly isn't a negative for the market," but
"the tender levels don't look that attractive for investors," said
Tom Ross, a portfolio manager at Henderson Global Investors, who
doesn't hold Deutsche Bank bonds. He said the buyback doesn't
address bigger questions about Deutsche Bank's capital levels.
The bank said Friday that it had EUR215 billion in reserves at
the end of 2015, as previously disclosed.
Deutsche Bank "is taking advantage of market conditions to
repurchase this debt, lowering its debt burden at attractive
prices," said finance chief Marcus Schenck. "By repurchasing this
debt below its issue price, the bank realizes a profit."
However, any profit would be small, because the senior debt
involved is trading, on average, barely below face value, Citigroup
Inc. analysts said in a note Friday. "Any profit (and corresponding
capital gain) will be minimal. Instead the rationale behind this
offer is purely to drive sentiment," they wrote.
Before the announcement, Deutsche Bank's shares had risen 8%
Friday. They finished up 12% on the day. Word of a potential bond
buyback had helped stabilize the bank's shares earlier in the week
following a 9.5% fall on Monday.
Shares in the lender have been whipsawed this week amid
questions about the bank's restructuring and ability to pay
optional interest payments on its riskiest debt. The stock is down
32% this year.
A commonly watched risk barometer, credit-default swaps
reflecting the cost of insuring against default on Deutsche Bank's
senior debt, dropped Friday.
Shortly before the buyback was announced, the annual cost of
insuring against a default on $10 million of Deutsche Bank senior
debt for five years was $256,000. That cost fell to $235,000 after
the buyback announcement, according to data provider Markit.
On Thursday, the swaps rose as high as $286,000 during European
trading and finished at $268,000. It last hit those levels in
November 2011.
The bond buyback "is just trying to target the
[credit-default-swaps] spread. [Swaps are] an indicator for
counterparty risk, so risk managers look at it," said Richard
Klijnstra, a fund manager at Kempen Capital Management, who doesn't
own Deutsche Bank bonds.
Some of Deutsche Bank's debt rose Friday. The price of a EUR1.5
billion euro-denominated bond included in the tender, which pays a
floating interest rate and matures in September 2021, rose nearly 2
euro cents, to EUR94.335 following the announcement, according to
MarketAxess, a trading platform.
Deutsche Bank said the bond buyback wouldn't affect its ability
to pay interest on its riskiest debt, called contingent convertible
bonds. They are formally called additional Tier 1 debt.
The bank this week issued a rare statement reassuring the market
it had sufficient funds to pay interest on that riskier debt. In a
letter to employees, co-Chief Executive John Cryan said Deutsche
Bank is "absolutely rock-solid."
On Friday, Germany's finance minister said he wasn't concerned
about the financial health of Deutsche Bank. "Deutsche Bank has
sufficient capital, " Wolfgang Schäuble told journalists in
Brussels. "Deutsche Bank is a strong bank," he said.
Madeleine Nissen and Gabriele Steinhauser contributed to this
article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com, Christopher
Whittall at christopher.whittall@wsj.com and Madeleine Nissen at
Madeleine.Nissen@wsj.com
(END) Dow Jones Newswires
February 12, 2016 13:20 ET (18:20 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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