By Victor Golovtchenko
The Financial Times is reporting that the German lender at the center of the market meltdown in European equities is considering buying back its own bonds in response to rumors about its solvency.
Sources with knowledge of the matter have confided to the newspaper that this is the latest step which the bank is considering to boost the confidence levels of its investors. Shares of the German lender have plummeted 40 per cent this year amid concerns over the ability of Deutsche Bank (DE:DBKGn) to meet its obligations.
According to the information published by the Financial Times, the buyback is likely to involve Deutsche Bank’s senior bonds, which have not been the center of the concerns expressed by investors.
#DeutscheBank has $2 TRILLION Balance Sheet w $60 BILLION Equity, 30:1 Leverage, just about what #Lehman had when it went down, hello — M Kop (@mkopNY) February 9, 2016 The German lender has issued about €50 billion worth of senior bonds to date, however the markets are focusing on another set of obligations, named contingent convertible bonds, or ‘cocos’. Currently some of Deutsche Bank’s debt securities are trading just above 75 percent of their face value. Contingent Convertible Bonds or ‘Coco’ Bonds In the aftermath of the financial crisis, some banks have come up with a new type of debt security called contingent convertible bond or ‘coco’. Financial institutions worldwide would be able to sell these securities to investors while reserving the right to cancel interest payments, convert the debt to equity or in the worst case scenario default on their ‘coco’ obligations.
As of the end of 2014, Deutsche Bank had issued about €2.9 billion worth of ‘coco’ bonds, however investors are speculating that this number substantially increased last year. With the value of the securities plummeting, investors are expressing worry that the bank will be forced to trigger a clause in the contract which triggers the conversion/default on interest payments or the whole debt altogether.
Higher interest rates on the ‘coco’ bonds have made them a lucrative investment for a number of firms, however the markets have raced to question the ability of Deutsche to meet its capital requirements. Banks have been frequently using ‘coco’ bonds in the aftermath of the financial crisis to shore up their capital requirement ratio.
In a note to the bank's employees, the co-CEO of Deutsche Bank John Cryan stated: "You can tell clients that Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position. On Monday, we took advantage of this strength to reassure the market of our capacity and commitment to pay coupons to investors who hold our Additional Tier 1 capital. This type of instrument has been the subject of recent market concern."
#DeutscheBank is in deep trouble but it's not collapsing. Chill out folks. — Yannis Koutsomitis (@YanniKouts) February 9, 2016 Shareholders of Deutsche Bank remained jittery, as the co-CEO's message was not met with the same degree of confidence by the markets. Shares of Deutsche lost close to 10 per cent this week, before rebounding about 5 per cent this morning with the market digesting the FT report. Market Turmoil and the FX Brokerage Industry While most brokers have reported higher volumes in the aftermath of a sluggish fourth quarter in what was a fairly volatile month of January, February is starting on an even more volatile note. With the stock markets being jittery, a number of currencies have moved in extraordinary fashion- perhaps most notably, the Japanese yen.
With persisting volatility, the average daily volumes for February are so far between 15 and 20 percent higher than in January. In addition to foreign exchange volatility, traders are focusing their attention more heavily on the equity markets, driving a good amount of their trading activity towards indices and commodities.
Looking ahead, volatility is likely to persist for some time, with markets nervously looking ahead towards the European Central Bank’s (ECB) and Federal Reserve’s meetings in March.