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Trading  | June 20, 2017

One year ago, when Deutsche Bank was sliding on concerns about its bad loan book, Germany’s Bremer Landesbank which at the time had €29 billion in assets, saw its bonds plunge overnight when concerns emerged about an imminent failure by the German lender.

Back then the worry was that the bank’s extensive portfolio of nonperforming shipping loans would require either a bailout by a bank, with the name of majority owner NordLB cited, or a state rescue. It was a report by Germany’s Handelsblatt that unleashed the selling, and fear of another European bank failure, after it said that a bailout may not come: “shipping loans have brought Bremer LB into distress and the bank can not survive without government help, but a direct capital injection from Lower Saxony now looks unlikey.” Eventually, the crisis passed after NordLB took full control of Bremer LB last September, with concerns about its viability swept under the rug.

Fast forward to today, when moments ago in a historic development, the German bank again made headlines again after it said it would “strip”, or cancel the interest payment, on its most subordinated debt, impacting two Euro AT1 notes, the first such move by a German bank which effectively amounted to a partial “self-bail in.”

In a statement, the bank said “The Management Board of Bremer Landesbank decided to cancel, at the next Interest Payment Date, all payment of interest on the AT1 Notes forming part of the own funds”

With respect to the notes issued by Bremer Landesbank Kreditanstalt Oldenburg -Girozentrale- (“BLB”) as “EUR 50,200,000 Perpetual Non-cumulative Fixed to Reset Rate Additional Tier 1 Notes of 2015” (ISIN: DE000BRL00A4, WKN: BRL 00A) and as “EUR 100,000,000 Perpetual Non-cumulative Fixed to Reset Rate Additional Tier 1 Notes of 2015” (ISIN: DE000BRL00B2, WKN: BRL 00B) (together the “AT1 Notes”) forming part of BLB’s own funds the Management Board (Vorstand) of BLB decided today, by exercising its sole discretion pursuant to § 3 (8) (a) of the relevant terms and conditions of the AT1 Notes, to cancel all payment of interest on the AT1 Notes for the current Interest Period at the next Interest Payment Date on 29 June 2017.

Specifically, the bonds affected are the bank’s perpetual €50.2MM 8.5% and €100m 9.5% AT1 notes which will no longer pay a cash coupon starting June 29 payment.

In kneejerk response, the bank’s 9.5% junior bond fell 10% to trade at just over 80 cents on the euro on Tuesday. The 8.5% bond tumbed to 78 cents on the euro.

To be sure, one of the purposes behind such Additional Tier 1 (AT1) bonds under Europe’s EBRD resolution mechanism is to take losses at times of distress, such as what happened today in Germany. The only problem is that nobody saw it was coming. After all, Europe is said to be “doing better” than the US these days.

Investor concerns about such self-imposed “bail-ins” have been especially acute in recent weeks, following the collapse and bail-in of Spain’s sixth largest, at the time, bank Banco Popular which suffered a major bank run on concerns about its viability, prompting the government and ECB to put it into resolution and to be acquired by Santander for €1.

In some ways today’s move is more troubling as in the Banco Popular “bail in” losses were not imposed through a coupon cancellation prior to the bond write-down, suggesting that the facade of some of Europe’s more “stable” bank hide far more substantial balance sheet impairments than the market anticipates. With European stocks closed for the day, there has been no follow through yet to Bremer LB peers or other continental assets.

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