Deutsche Bank CoCo Bonds Soar To 11.5% Yield Following Bailout Demands

Submitted by Anthony Sanders via Confounded Interest blog,

No, a Coco bond is not a new Chanel perfume or a Hersheys product. Rather, CoCo stands for contingent convertible capital instrument (CoCo) are is a hybrid capital security that absorbs losses when the capital of the issuing bank (such as Deutsche Bank) falls below a certain level.

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Italy’s Unicredit and Spain’s Banco Santander have higher CoCo bond yields.

Deutsche Bank raised nearly €20 billion in 2010 and 2014, by selling shares, which diluted existing shareholders, and by issuing CoCo bonds, spread over four issues in dollars, euros, and pounds. CoCo bonds have no maturity and are perpertual. The coupons range from 6% (EUR demoninated) to 7.50% (US Dollar denominated).

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The purpose? To prop up Tier 1 capital,  And yes, the capital trigger is mechanical, not arbitrary.

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And now that 'protective' capital is collapsing...

 

And now, Deutsche Bank’s Chief Economist, David Folkerts-Landau, is calling for a 150 billion Euro bailout of EU banks (the largest and most sick being … Deutsche Bank).

Speaking to Germany's Welt am Sonntag, the economist said European institutions should get fresh capital for a recapitalization following a similar bailout in the US. What he didn't say is that the US bailout took place nearly a decade ago, in the meantime Europe's financial sector was supposed to be fixed courtesy of "prudent" fiscal and monetary policy. It wasn't.

 

As Landau says the US helped its banks with $475 billion dollars, and such a program is now needed in Europe, especially for Italian banks. In other words, just because the US did it, now it's Europe's turn to ask for more of the same.

 

"In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize," said David Folkerts-Landau. He adds that the decline in bank stocks is only the symptom of a much larger problem, namely a fatal combination of low growth, high debt and a "dangerous" deflation.

 

"Europe is seriously ill and needs to address very quickly the existing problems, or face an accident," said the chief economist.

 

The Deutsche Bank expert said he is particularly worried about Italy and the condition of local banks, where the €40 billion in funding needs is said to be "conservative." He said that the bank bailout is so urgent that it should permit Europe to violate the bail-in rules of the new Banking Directive. The economist notes that such a bail-in is not doable and is politically unfeasible because it would hit people's savings and may cause a bank run in both Italy and elsewhere. We find it strange how nobody thought of this before the rules were implemented, or rather how impairing savings was only a problem when "second-rate" European citizens such as those in Cyprus and Greece were affected. Now that Italians and even Germans are in the cross hairs, suddenly "it is time to change the rules."

 

His conclusion: "Strictly adhering to the rules rules would cause greater harm than if they were suspended."

 

Our only question is whether Deutsche Bank's chief economist is more worried about the future of Italy's banks, or that of his own employer.

No, it wasn’t Deutsche Bank’s US economist Joe LaVorgna, who looks exactly like he did when I worked at DB.

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But I suspect LaVorgna will soon look like Folkerts-Landau if Deutsche Banks doesn’t stop hemorrhaging.

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Just add a pair of cheesy glasses to the photo below and a pink tie and you have a stressed-out Joe LaVorgna.

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Hey, I thought CoCo bonds were supposed to protect taxpayers, such as EU member Great Britain??

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