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Stronger Together?

18 March 2019 by jbchevrel

Deutsche Bank (DB) was the outperformer in SnrFin and SubFin CDS indices today, its 5y senior CDS is tighter -8bp, sub is -20bp. This is as DB and Commerzbank (CMZB) are now officially in merger talks, according to company releases. We basically moved from unofficial talks to official talks. This was after the government signalled it wouldn’t stand in the way of necessary job and cost cuts. The Finance Ministry is still in contact with both parties, Scholz having been favouring a deal for months. Germany’s government's will is important, and it will probably stay that way, as reportedly their preferred option is to maintain a stake in the new proforma entity. As DB is the bigger entity, it would probably be the acquirer, but for that it needs c€8B. That could come from an equity raise, but shareholders have been tapped c€30B over the past decade. So more likely from DWS 78% stake sale (c€4.8B market value). That capital raise is indeed good for credit, therefore we see DB spreads tightening towards CMZB’s. Today we learnt that Allianz is interested in DWS. Although the odds of a deal have undoubtedly gone up, some hurdles remain (DB shareholders’ & regulators’ approvals).