Deutsche Bank is facing multimillion-dollar losses within its US investment banking unit after the German lender struggled to offload two risky corporate loans.
The losses will turn up the heat on Christian Sewing, Deutsche boss, and his management team. They are working on plans to boost meagre returns, including through the creation of a so-called “bad bank” to hive off troubled assets.
The latest hits stem from two loans that the bank agreed to underwrite for private equity clients, according to people with direct knowledge of the deals. One was to fund the buyout of the Smart & Final grocery chain by Apollo Global Management and the other to spin out part of Evonik, a German speciality chemicals maker.
Deutsche declined to comment on the deals.
The bank was forced to take a loss on a $340m loan backing the leveraged buyout of Smart & Final after investors refused to buy the debt under the original terms offered. Deutsche led a group of banks that ultimately priced the loan at a discount of 90 cents on the dollar, erasing the fees it would have earned on the transaction, said the people. The exact size of Deutsche’s loss could not be determined.
“If it’s a tough deal, investors are looking for discounts because it’s an immediate protection for them and because the market is softer,” said one banker close to the deal. “The banks have to reach into their own pocket.”
A second, much bigger deal — a €1.5bn loan funding the buyout by Advent International, a private equity group, of a plastics business owned by Evonik — also faced a lukewarm reception from investors. They were worried about global growth prospects eating into the fees that Deutsche and a group of banks led by Barclays had hoped to generate.
The deal eventually priced at a discount of 95 cents on the dollar, according to people familiar with the terms. Barclays declined to comment.
Details of both loans have previously been reported by Bloomberg and LCD News, a division of S&P Global.
The divisions within Deutsche responsible for originating the loans are not the focus of the latest round of cuts within the bank, which are aimed primarily at the equities business and trading activities outside of continental Europe. But the losses will eat into returns from what has been a troubled line of business for the Frankfurt-based bank. Net revenue from debt arranging dropped 19 per cent last year to €1.1bn, the bank has reported. In the first quarter of this year fees were down another 8 per cent, contributing to an overall 13 per cent fall in quarterly net revenues for the investment banking unit.
The latest blows for Deutsche come as hints of interest cuts from the Federal Reserve have boosted fixed-income markets, almost across the board. But any move by the Fed to cut rates reduces the appeal of floating-rate loans. As a result, mutual funds and exchange traded funds that specialise in loans have experienced billions of dollars of outflows.
Loan issuance has slowed from its rampant pace in 2017 and 2018, increasing competition among Wall Street banks to finance the deals available.
“Because volumes are off, the banks are already behind budget,” said the banker. “Adding losses on deals to that, really starts to hurt.”
Additional reporting by Olaf Storbeck
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