Deutsche Bank just announced a bond buyback and now the stock is surging (DB)

February 12, 2016 at 08:32 AM EST

REUTERS/Kai Pfaffenbach

Deutsche Bank just announced plans for a big bond buyback.

The stock was up more than 9% following the news.

The plan is to buy about $5.4 billion in total — €3 billion ($3.4 billion) in euro-denominated bonds and $2 billion in dollar-denominated bonds.

The tender is expected to be open for seven business days for the euro-denominated bonds and 20 business days for the USD-denominated bonds.

"The Bank is taking advantage of market conditions to repurchase this debt, lowering its debt burden at attractive prices," chief financial officer Marcus Schenck said in a statement.

"By repurchasing this debt below its issue price, the Bank realises a profit. Deutsche Bank is also using its strong financial profile to provide liquidity to bond investors in challenging market conditions."

Deutsche Bank last month announced a full-year loss of $7.4 billion for 2015.

The Frankfurt, Germany-based firm's share price reached record lows following the release, and on Monday it issued a statement to reassure investors.

The statement said the firm had enough capital to make the coupon payment owed to holders of contingent convertible, or CoCo, debt – a type of bond that takes losses if the bank gets into trouble – in April.

Co-CEO John Cryan said the bank's capital position is "absolutely rock-solid," in a memo to employees sent out Tuesday.

"We took advantage of this strength to reassure the market of our capacity and commitment to pay coupons to investors who hold our Additional Tier 1 capital. This type of instrument has been the subject of recent market concern," Cryan added.

As Business Insider's Myles Udland reported, CoCo debt is effectively a junior bond the market is worried will be written down by the bank or, as is possible under the terms of these instruments, be converted to equity. More on that here.

As Business Insider's Ben Moshinsky noted, a bond buy back could make sense Deutsche Bank: If the bonds are cheap on the secondary market, then buying them back would cost the firm less money in the long run than letting them mature and paying out the face value owed.

Here's a statement from Deutsche Bank CFO Marcus Schenck:

Deutsche Bank today announced that it plans to repurchase some of its senior unsecured debt in the market. The Bank has a target acceptance volume of EUR 3 billion of euro-denominated debt and of USD 2 billon of dollar-denominated debt through a public tender offer.

From today, the tender is expected to be open for seven business days for the euro-denominated bonds and 20 business days for the USD-denominated bonds, subject to lower pricing for bonds tendered after the tenth day of this period.

The Bank is taking advantage of market conditions to repurchase this debt, lowering its debt burden at attractive prices. By repurchasing this debt below its issue price, the Bank realises a profit. Deutsche Bank is also using its strong financial profile to provide liquidity to bond investors in challenging market conditions. At the end of 2015, the Bank had around EUR 215 billion in liquidity reserves and our liquidity coverage ratio, which measures a bank’s ability to meet short-term liquidity needs, was around 120%.

Deutsche Bank is also making the most of a strong capital and risk position. Based on our published preliminary results, our Common Equity Tier 1 (CET1) ratio as at 1 January 2016 is 12.52% on a ‘phased-in’ basis – around 180 basis points, equivalent to around EUR 7 billion of Common Equity Tier 1 capital, higher than regulatory requirements for 2016. Levels of market risk are low by any historical measure and credit risk costs, at around 30 basis points of average loans in 2015, are below peers.

Deutsche Bank is able to repurchase these bonds without altering our 2016 funding plan – we have already completed EUR 4 billion of our 2016 full-year funding plan of up to EUR 35 billion.

This repurchase has no impact on the Bank’s capacity to service coupons on its Additional Tier 1 (AT1) capital during 2016 or 2017.

And here's the press release from Deutsche Bank:

Deutsche Bank (XETRA: DBKGn.DE/NYSE: DB) announces a public tender offer to purchase certain series of EUR and USD-denominated senior unsecured debt securities.

The Bank's strong liquidity position allows it to repurchase these securities without any corresponding change to its 2016 funding plan.

The EUR tender offer encompasses the following securities and has a target acceptance volume of EUR 3 bn.

ISIN
DE000DB7XHM0
DE000DB7XJB9
DE000DB7XJC7
DE000DB5DCS4
DE000DB7XJP9

The USD tender offer encompasses the following securities and has a target acceptance volume of USD 2 bn.

ISIN
US25152R2U64
US25152R2X04
US25152R2Y86
US25152RVS92
US25152RXA66
US25152RYD96
US25152RWY51
US25152CMN38

The tender offer is expected to be open for seven business days for the EUR denominated securities, and 20 business days for the USD denominated securities, subject to lower pricing for bonds tendered after day 10.

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