Deutsche Bank has some debt cut by Moody's to a step above junk

Deutsche Bank is "absolutely focused on changing the direction of our ratings," says von Moltke

Deutsche Bank had the credit rating of one type of debt cut by Moody’s Investors Service after a change in German law last month paved the way for a more senior kind of borrowing.
 

In a move that was widely anticipated, Moody’s downgraded the bank’s senior non-preferred debt to Baa3 — the lowest investment grade — from Baa2 and reclassified the bonds as “junior senior” debt. The government is now less likely to support what are currently senior notes, the ratings firm said in a statement Friday.
 

Deutsche Bank Chief Financial Officer James von Moltke, in a call with analysts on July 25, called the expected downgrade a “technical adjustment” as a result of the legislative change. “The good news” is that Deutsche Bank can now issue senior preferred debt, Moltke said. It will start doing so “in the near term,” Group Treasurer Dixit Joshi said two days later on a separate call, adding that he expects funding costs to decline as a result.
 

Elevated funding costs have emerged as a particular problem for Deutsche Bank as they put it at a disadvantage to its competitors. Spreads on the bank’s five-year senior credit default swaps — a common proxy indicator for those costs — have almost doubled since the beginning of the year as credit investors have taken a dim view of the bank’s ability to return to healthy profitability soon.

Change of direction
 

A rating downgrade of the bank by S&P Global Ratings two months ago contributed to the rise in CDS spreads. Deutsche Bank is “absolutely focused on changing the direction of our ratings,” von Moltke said on the July 25 call.
 

The new German law, which came into effect on July 21, allows banks to issue a class of senior debt that will be practically immune from losses in the case of a bank failure. That will give investors a safer asset to buy, likely eliminating at least some of the disadvantage in funding costs. The legislative change comes after a 2015 law modified existing senior bank bonds so that they could absorb losses in a resolution process.
 

France chose a different approach. It kept existing notes unchanged and instead created a new type of debt that can more readily be ‘bailed-in.’ The European Union ultimately favored the French option, leaving Germany -- and the country’s banks -- out of line with the rest of the bloc.
 

“The legal hierarchy of bank claims in Germany is now consistent with most other European Union countries,” Moody’s said in the statement Friday. The new preferred debt securities will be assigned an A3 credit rating by Moody’s, according to a Deutsche Bank presentation. That would place them three notches above the rating on its non-preferred debt.

In a separate statement, Moody’s said it downgraded long-term senior unsecured debt of 14 German banks.