What Deutsche Bank’s Plunging CoCo Bonds Just Said about the Bank’s Future

• What Deutsche Bank’s Plunging CoCo Bonds Just Said about the Bank’s Future
  by Wolf Richter, http://wolfstreet.com/  
  “They’re just too close to the wire.”
  Shares of scandal-plagued, litigation-hammered, loss-ridden Deutsche Bank, one of the largest and least capitalized megabanks in the world, closed at €16.32 today in Frankfurt, down 50% from April last year. Investors are fidgeting in their seats, cursor on the sell-button.
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  In October, it had announced that it would shed divisions, clients, and employees, and hopefully some risks, and that it would scrap its dividends.
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  January 20, the bank reported “earnings” – in quotes because it was a sea of red ink. It had lost €2.1 billion in the fourth quarter, including €1.2 billion in its investment banking division where revenues had plunged 30%. This brought “earnings” for the year to a record loss of €6.8 billion.
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  You’d think Europe is still in the middle of the Financial Crisis, to run up these kinds of losses and go through these sorts of gyrations. But no. Draghi has everything in his iron QE-and-negative-interest-rate grip. Under his regime, even fiscally challenged Spain can borrow for ten years at less than 1.6%.
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  Last week, Deutsche Bank CFO Marcus Schenck shared his hopes on CNBC that 2018, the distant future, would be the first “clean” year. So now all hands are on deck to keep Deutsche Bank from toppling before then.
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  All these losses, write-offs, and fines have eaten into Deutsche Bank’s already low capital buffer. To prop up Tier 1 capital, Deutsche Bank had issued the equivalent of €4.6 billion (about $5 billion) in “contingent convertible bonds,” spread over four issues, two in dollars, one in euros, and one in pounds – something for everyone.
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  These CoCo bonds, as they’re called, are special: The bank can call them after a certain date but doesn’t have to redeem them; annual coupon payments are contingent on the bank’s ability to stay above certain cash and capital requirements, as specified by German and European banking regulations; and investors cannot call a default if the bank fails to make the coupon payment.
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  Despite the risks, yield-desperate investors eagerly gobbled them up. Now Deutsche Bank is just a hair away from breaching the limits. And there’s a lot of nail-biting.
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