Deutsche Bank doubles down on leveraged loans in growth push

Bloomberg

As John Cryan mulls steps to restore growth at Deutsche Bank AG,
he’s counting on US companies’ appetite for ever more debt to help lead the charge.
The Frankfurt-based lender added 24 managing directors and directors at its US corporate finance business this year, a record hiring pace, according to Mark Fedorcik, co-head of Deutsche Bank’s global capital markets unit. Among the goals: to become a top arranger of leveraged loans again, the risky debt that has surged amid low interest rates and the prospect of a rollback of post-crisis regulations.
“Next year will be a robust one for US leveraged finance and we’re going to capitalize on this,” Fedorcik said in an interview. “It’s an area that we’re going to continue to invest in and regain a top-five position.”
Deutsche Bank has slid to ninth place among arrangers of US leveraged loans this year, a lucrative business where it used to be among the top five before the financial crisis, as Cryan, the bank’s chief executive officer, reduced risk and expenses. With pressure rising on the 56-year-old Briton to reverse three straight quarters of declining revenue and deploy fresh capital, he is encouraging employees to take more risk again.
Cryan, who is favoring client-focused businesses such as corpo-
rate finance to reduce reliance on volatile trading, said last month that he has yet to put to work a single cent of the 8 billion euros ($9.3 billion) Deutsche Bank got from
investors in April.
“Deutsche Bank had a premiere leveraged loan business pre-crisis and before they had issues with their balance sheet,” said David Knutson, head of credit research for Americas at Schroder Investment Management, which oversees more than $500 billion. “The market looks attractive to them and I’m not surprised they’re ramping up.”
Deutsche Bank shares rose 0.9 percent to 14.64 euros at 9:13 a.m. on Tuesday, paring losses this year to 4.9 percent. Banks arrange leveraged loans for companies that are already indebted, and which use the money to finance things like buyouts, pay shareholder dividends and refinance borrowings. The lenders typically seek to sell the debts on to investors, who are attracted by the more lucrative repayment rates.
That attraction has grown as central banks around the world keep interest rates near record lows. Investment banks have arranged $1.2 trillion of US leveraged loans for clients so far this year, more than any other year since at least 2006 and already 18 percent more than all of 2016, data compiled by Bloomberg show.
Adding to the frenzy is the US Treasury Department, which has proposed loosening restrictions imposed on Wall Street banks after the 2008 financial crisis. Some analysts fear this could mean a return to the kinds of high-risk loan deals that saddled lenders — including Deutsche Bank — with billions of dollars of debts they couldn’t sell during the crash.
“The risks of this debt binge are significant,” analysts at Standard & Poor’s wrote in an Oct. 10 report. “Excessive leverage can bring do-
wn a company as fast as prudent borrowing built it up.”