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Wednesday, December 17, 2008

Deutsche Bank Passes On Bond Redemption

This is not a huge surprise to me, but it is shaking up European markets noticeably:
Deutsche Bank AG, Europe’s biggest investment bank by revenue, passed up an opportunity to redeem 1 billion euros ($1.4 billion) of subordinated bonds, saying it would be more expensive to refinance the debt.
On Jan 16th, the bonds step up to Euribor plus 88 basis points (0.88%). It is a rare event indeed for a bank to pass a call date (early redemption) on its bonds. The reason is that passing such a date will automatically raise all your future borrowing costs for a time, because the bonds out there usually lose some of their market value.

Earlier in 08, an Italian bank passed, which caused some stress at the time. However Deutsche Bank is a giant, and this will cause a readjustment in market expectations in Europe. Deutsche Bank took some significant losses this year. In the first quarter, it moved to a net loss after writing down 4.2 billion in assets and securities. In the second quarter Deutsche Bank did better, which brought it to a pre-tax nominal first half quarter profit of 0.4 billion.

Speculation is running rampant that DB will report a fourth-quarter loss on write-downs and trading losses.

This failure to redeem those bonds is a big deal.

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