The evidence doesn’t point to recession
The reshaping of Deutsche Bank since the end of the global financial crisis has been one of the longest-running transformation stories in the banking sector. In the last few years, discussing the CoCo bond market with investors would lead to immediate questions like, "Do you own Deutsche Bank?" Until very recently, our answer would always have been "no" or "not yet". However, the bank’s transformation story has gathered pace, and Deutsche Bank is a very different animal from the one that struggled to reposition itself for much of the last decade.
On Monday, Deutsche became just the second issuer of Additional Tier 1 bonds since the Ukrainian crisis. Initially, bonds were guided to a yield of 7.125%, but after a rapid and impressive book build, the coupon became fixed at 6.75%, and the €750m new issue attracted demand of almost €6bn. Meanwhile, in secondary trading, the bonds have quickly moved to a price of 102, representing very strong execution and fair pricing for investors.
Deutsche Bank's public relations exercise is clearly working; its creditworthiness is significantly better and bondholders' perceptions of the bank have also changed. Readers might remember back in 2008 that Deutsche Bank became the first major bank not to call its lower Tier 2 bond at the first possible date. Then, during that hairy period that followed the commodity price slump in 2016, questions around the banking system arose once again, and the market's big question was whether Deutsche would actually pay its AT1 coupon. They did, and the nascent AT1 sector subsequently embarked on a strong rally.
Monday's deal was noteworthy not just because of its strong demand but also because it refinanced a bond Deutsche had called in January with a reversionary spread of +469bp and replaced it with a new bond with a spread of +569bp. Essentially, Deutsche Bank is paying up to do the right thing for bondholders.
Most issuers in the AT1 space take a pragmatic view of refinancing these days. Provided that the cost of refinancing is not prohibitively expensive or comes at a time of depleted capital levels, AT1 issuers will call their bonds on time and refinance, even if it involves a small cost.
So we have to say well done to Deutsche Bank on many fronts. Ultimately, the combination of robust demand and ultra-low supply in the AT1 sector provides an excellent technical position for the sector to perform after a recent period of underperformance.