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The CoCo that popped

Let’s go back in time — to May 2014. Deutsche Bank was in the market to raise capital, including at least €1.5bn of additional Tier 1 capital securities. Or CoCo (short for contingent convertible) bonds. Deutsche ended up issuing €3.5bn, on €25bn of demand. Quite a few investors must have liked the sound of the bonds’ 6 per cent coupon. Hopefully they came to that conclusion after perusing the prospectus. Especially this bit, on deferring coupon payments if the accounting-related amount available for distributing them (not the same as Deutsche’s overall capital or liquidity) isn’t enough. (This is before looking at write-down / conversion, in the event of the bank’s capital ratio being too low. This feature is why we’re using the CoCo term for the bonds as well as AT1. Blast us in comments if you’d see them differently.) Of course, you’ll probably know AT1 bonds like these better for having left the market agape in the last couple of days. On Monday for example, they were being marked at 70 to 75 cents on the euro. That seems to price in Deutsche (or its “competent supervisory authority”) not authorising a coupon payment this year nor for some time to come, which seems pretty extreme. For want of liquidity in what they actually bought, some investors even bought protection on Deutsche’s senior bonds.

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Let’s go back in time — to May 2014. Deutsche Bank was in the market to raise capital,...

Joseph Cotterill
Joseph is the FT’s Southern Africa correspondent based in Johannesburg, after previous stints as private equity correspondent and on the Lex column. But he still writes for Alphaville, which he joined way back in March 2010 — right in the middle of the Greek bailout crisis. He has been very interested in all things credit and sovereign debt ever since…

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