Deutsche Bank CoCo ratings cut by S&P on earnings uncertainty

A statue is seen next to the logo of Deutsche Bank in Frankfurt, Germany.
A statue is seen next to the logo of Deutsche Bank in Frankfurt, Germany. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Deutsche Bank had the credit rating on some of its debt cut by Standard & Poor's, which cited concerns that Germany's biggest lender could report a loss that would restrict its ability to pay on the obligations.

S&P reduced its grade on the bank's Tier 1 securities to B+ from BB- and cut its perpetual Tier 2 instruments to BB- from BB, according to a statement on Thursday (feb 11).

Deutsche Bank's buffer of available distributable items has contracted and it "could report further unconsolidated losses under German generally accepted accounting principles," S&P said. Both metrics are used in calculating the sizes of optional payments such as coupons and dividends banks can make to investors who hold the instruments.

Deutsche Bank last month posted its first full-year loss since 2008, and its shares have plunged 39 per cent this year in Frankfurt trading. The bank may struggle to pay coupons to investors in the Additional Tier 1 securities, also known as CoCos, in 2017, analysts at CreditSights Inc wrote this week.

The securities, designed to absorb losses and protect European taxpayers from funding bailouts, were created to help troubled banks hang onto cash in times of stress by allowing coupon payments to be skipped without causing a default. The instruments are facing their first test as weak bank earnings and a global market rout raise concerns about banks' stability and growth.

Renee Calabro, a New York-based spokeswoman for Deutsche Bank, declined to comment.

S&P said its "central expectation" was that the bank's payment capacity for 2017 "should be sufficient to enable continued Tier 1 interest payments."

Deutsche Bank estimated this week that next year its payment capacity would be about 4.3 billion euros, boosted in part by proceeds from the announced sale of a stake in Huaxia Bank Co. The 2017 estimate is before any effect from 2016 profit or loss.

Credit ratings for Deutsche Bank weren't affected by the cut to the debt, S&P said.