Bondholders snapped up Bankers Trust Corp. securities Monday and sold dollar-denominated bonds issued by Deutsche Bank AG on news that the New York money-center was negotiating a sale to the German banking giant.
Bankers Trust and Deutsche re-leased a joint statement confirming that they were in "advanced stages of negotiations concerning a potential cash merger combination." The deal would create the largest banking company in the world.
The response of U.S. bank bondholders to the potential deal was immediate. Bankers Trust's 10-year bond spreads-the difference between its corporate bond yields and those on Treasuries-tightened by 40 basis points in less than an hour as investors enthusiastically bought the bonds.
Bondholders expect the agencies to upgrade Bankers Trust if it merges with the much higher-rated Deutsche. An upgrading would mean that bondholders are likely to recoup most of the losses that they have suffered in the past month, said bank bond analyst Katherine Rossow of Chase Securities Inc.
Like most money-center bank paper, Bankers Trust's bonds suffered after the economies of other countries began faltering in August. The bonds took another drubbing when the company announced a $488 million loss in the third quarter.
Though spreads tightened somewhat, Bankers Trust's bonds continued to underperform those of other money-center banks.
However, a deal with Deutsche would probably bring more value to Bankers Trust bonds, market experts said.
"Chances are we would up-grade," said rating analyst Thomas Stone of Duff & Phelps Credit Agency. "Deutsche bank is a powerhouse that brings a lot of financial strength to Bankers Trust."
However, not all investors were euphoric about the potential deal.
As Bankers Trust bondholders were buying more bonds, investors in dollar-denominated Deutsche bonds, better known as Yankee bonds, sold their investments.
Deutsche's Yankee bonds spreads widened about 10 basis points shortly after the deal was announced, traders said.
The potential deal could mean downward rating pressure on Deutsche Bank, said Ms. Rossow. "Standard & Poor's and Moody's both have a negative outlook on the bank," said Ms. Rossow. "Because this acquisition would be so substantial, it is likely that Deutsche Bank will be put on review for a downgrade."
Late Monday afternoon, Moody's Investors Service announced that it was putting Deutsche's long-term rating on review for possible downgrade.
Fitch IBCA was the first agency to shoot off downgrade action. In a press release issued Monday afternoon, Fitch IBCA said that it was putting Deutsche bank's long-term ratings of 'AA+' on RatingAlert negative.
Although few details are known about the deal, "acquisition is likely to give rise to a substantial amount of goodwill," Fitch IBCA said, referring to an intangible asset representing the purchase price which Deutsche bank would have to amortize over time.
"It is also going to be challenging to put these two companies together," said Michael Gross, managing director of financial institutions at Fitch IBCA. "We are talking two different companies, with two different product mixes, from two different countries that speak two different languages."