New Terms for Deutsche Bank
Coming off the heels of an enormous scandal, Deutsche Bank AG (NYSE:DB) is asking creditors for another influx of cash at rates that are startlingly similar to junk-bond terms. The $1.5-billion-worth of notes are on top of the $3.0 billion that Deutsche Bank sold to investors last week.
Considering that the U.S. Department of Justice is trying to charge Deutsche Bank $14.0 billion for mortgage securities violations, it makes sense that the bank’s borrowing costs would rise.
The notes carry a 4.25% yield, which represents a 290-point spread from Treasuries. (Source: “Deutsche Bank Bond Buyers Return for More Junk-Like Yields,” Bloomberg, October 11, 2016.)
It is a noticeably wide margin, especially given the low interest rate environment fostered by central banks around the world. There have been a number of corporate bonds issued with negative yields in parts of Europe and Japan.
Considering that junk bonds typically trade 300 basis points above Treasury yields, investors are clearly charging Deutsche Bank a premium for its legal troubles. Just last year, the bank issued notes at a mere 143-point spread from Treasuries.
In other words, it will cost the bank twice as much to service new debt as opposed to old debt.
However, the new round of funding is also viewed as a positive step in some quarters. There are observers who claim that Deutsche Bank is instilling market confidence in its stock by showing that the bank still has the ability to raise cash. Private lenders are still willing to give it money.
This helps explain why the mega-bank did not simply appeal to the European Central Bank to buy its debt, which would dovetail easily with the ECB’s bond-buying program. Not only would that have guaranteed Deutsche Bank a lower rate, but the bank could have raised even more cash.
If the aim was to instill confidence in Deutsche Bank’s brand, then it makes sense to have kept the funding round private. Showing the bank’s creditworthiness in the open market would act as a tonic for jittery investors who need reassurance that a bank run isn’t around the corner.