Db capital structure
- 1. DEUTSCHE BANK CAPITAL STRUCTURE TRADE • DB equity and AT1 markets are pricing bipolar outcomes. • DB equity (Eur11.41) at 33.7% CET1 tangible book value implies Common Equity Tier 1 (CET1) ratio at 3.93%. • Capital shortage implies complete writedown of AT1s (based on Jun18 interim financials) • DB AT1 price implies only 25% write-down. • For markets to converge, gap between equity and AT1 has to narrow
- 2. DEUTSCHE BANK CAPITAL STRUCTURE TRADE • Trade idea: – Short DB 6% AT1s at 75% – Long DB equity at Eur11.41 – Suggested ratio of equity to AT1: 70% – Based on equity price, writedown of AT1s and capital raising of 30% of implied Tangible Book Value (TBV), CET1 would meet regulatory threshold of 5.125% – Even with equity raise, DB will still trade 30% discount to TBV. JPM trades at premium to TBV.
- 3. DEUTSCHE BANK CAPITAL STRUCTURE TRADE • Scenario 1 – DB reduces leverage through asset reduction • Likely outcome, rise in equity and AT1s. Equity likely to outperform due to 67% discount to TBV • Assuming AT1 pricing back to par, DB shares should rise to to close the gap to TBV • Assuming it trades par to TBV, shares should trade at Eur33.8. (Note JPM trades at premium) • Gains on equity per Eur100 of AT1s = 0.7*75*33.8/11.41=Eur103 • Losses on AT1s = 25pts + carry cost of assumed 8% p.a.=Eur33 • Net Eur70 STATIC OUTCOME DRIVEN SCENARIOS
- 4. DEUTSCHE BANK CAPITAL STRUCTURE TRADE • Scenario 2 – DB equity pricing capital condition correctly • Likely outcome will be complete writedown of AT1s to zero, along with small raise in equity to keep CET1 at 5.125% • Assume 30% dilution for new capital raise • AT1s likely to keep some residual for potential write-up. Assume 10pt recovery • Losses on equity per Eur100 AT1 =0.7*75*0.30=Eur15.75 • Gains on AT1 =75-10 less 8% carry cost = Eur57.0 • Net Eur41.25
- 5. DEUTSCHE BANK CAPITAL STRUCTURE TRADE • Scenario 3 – DB gets bailed in completely • AT1s gets written down to zero and cancelled • Equity gets written down to zero • Losses on equity per Eur100 AT1s = 0.7*75= Eur52.5 • Gains on AT1s = 75 less 8% carry cost = Eur67.0 • Net gain = Eur14.5 • Scenario 4 – DB raises equity without writing down AT1s (very low prob) • AT1s goes to par • Equity diluted by 100% but goes to CET1 TBV • Assume number of shares double. • CET1 TBV per/share = Eur16.92 • Gains on shares = 0.7*75*16.92/11.41 = Eur77.8 • Losses on AT1s = 25 + carry cost of 8% = Eur33 • Net gain Eur44.85
- 6. DEUTSCHE BANK CAPITAL STRUCTURE TRADE • Delta hedging: Proximity of AT1 price to theoretical should define ratio. • If AT1 price approach theoretical, ratio should fall and vice versa. • Suggested ratio is based on bipolar scenarios from equity price and AT1 Price