7.5 percent return with the Sparkasse

The future of the Norddeutsche Landesbank is uncertain. This is an opportunity for the brave.

In difficult waters: The Norddeutsche Landesbank, here its headquarters in Hanover.

Sparking is the epitome of boredom. Reliable, but also pretty boring. But at the moment there is so much going on in the world of savings banks than ever before, which is least of all right for those involved. After all, boredom is part of the business model. It is often suggested: Who, if not the savings banks, can be trusted in these troubled times?

The nice thing about the financial markets is that they can expose such ideal images as false in no time at all: this is what happened these days with the Norddeutsche Landesbank (Nord LB for short), about 35 percent of which is owned by the North German savings banks. Other owners are the states of Lower Saxony (around 60 percent) and Saxony-Anhalt (around 5 percent). Of all things, bonds from this largely state-owned bank have suffered sharp price losses in recent weeks. The prices have fallen well below the value of 100 percent, which amounts to a clear vote of no confidence in bonds: Some investors doubt whether the bank will be able to repay the bond monies in full. In other words, you think the bank may go bust.

More than ten years after the collapse of the Lehman Brothers investment bank, that still sounds very ominous. But with a little courage, investors can look at the matter from a completely different perspective – as a lucrative investment opportunity. Because falling prices always go hand in hand with rising yields on bonds, which is also logical: the higher yield should compensate for the higher risk.

Image: FAZ

In the case of Nord LB, this income is currently very attractive, particularly in the current zero interest rate. A bond with a term until October 2023 (ISIN: DE000NLB2HC4), for example, currently brings in around 7.5 percent yield per year. For comparison: a federal bond with a significantly longer, ten-year term only has a meager 0.25 percent return. No wonder, then, that private investors are currently not as happy to trade bonds with online brokers as this specific Nord LB security. Especially since the bond also has an attractive denomination of 1000 euros for private individuals, which has become rare. With the current prices, investors do not even have to take 1000 euros into their hands to get in.

But is this really a good idea? To do this, it is necessary to deal more closely with two things: with the specific structure of the Nord-LB bond and with the overall situation of the Landesbank. Both are of course related to each other. Looking at the construction of a bond sounds more brittle than it is. Because Nord LB’s paper belongs to a particularly exciting type of bond, the so-called subordinated bond. These bear their name for a simple reason: in the event of Nord LB going bankrupt, the owners of these papers have to answer for it in front of other creditors – so, as the name suggests, they are not of the same rank.

You shouldn’t fool yourself

Nord LB has issued many such subordinated bonds in the past. The currently so popular paper with a term until October 2023 (called “Lower Tier 2” in technical terms) has one advantage: unlike many other subordinated bonds, the bank cannot simply skip interest payments if it has a bad year. An extension of the term is also not possible.

Nevertheless, you shouldn’t fool yourself. If the bank goes bankrupt, investors must expect the total loss of the money invested. This can be seen not only from the fact that the rating agency Moody’s classifies the bond as highly speculative with a “B1” rating. But this is also shown in practice: in the case of the Spanish bank Banco Popular, for example, all holders of subordinated bonds lost their entire stake. So this is no longer a purely theoretical risk.

But how realistic is this risk of failure really for a Landesbank, which for the most part belongs to the federal state of Lower Saxony, i.e. the state? From what you can hear, the situation is serious. Because Nord LB has put itself in an awkward position, especially with ship loans to shipping companies. Many of the debtors are in arrears with their payments, so the bank urgently needs fresh money. There is talk of up to 3.5 billion euros.

The American financial investor Cerberus in particular seems to be interested in getting involved, but only in return for considerable concession, of course. Cerberus already holds shares in Deutsche Bank and Commerzbank and in 2018 also took over another ailing Landesbank, HSH Nordbank. The fact that, of all things, an American company that appears wet research could now also save the Nord LB does not fit into the worldview of many savings banks. Nevertheless, other Landesbanks such as Landesbank Hessen-Thüringen (Helaba) do not seem willing to participate instead.

At a meeting next week, Sparkasse President Helmut Schleweis wants to campaign for an internal solution again. However, it is completely uncertain whether this will succeed. The confused situation shows: It takes a lot of courage to earn a 7.5 percent return.