Deutsche shows appetite for commodities risk

IFR 2420 - 12 Feb 2022 - 18 Feb 2022
3 min read
Christopher Whittall

Deutsche Bank was recently involved in a complex derivatives trade allowing a corporate client to hedge energy price moves, according to sources familiar with the matter, marking a rare foray into these markets for the German lender that shows it still has appetite to take commodities trading risk nearly a decade after it announced a withdrawal from much of that business.

Deutsche was one of a handful of banks involved in the so-called deal contingent hedge for a corporate client, sources said, a risky type of derivative structure banks provide to companies and investors to reduce their exposure to swings in financial markets around the time of major corporate events such as M&A. It came against the backdrop of a steep rise in commodity prices over the past year that bankers say has increased the appeal of commodity-linked hedges for corporate treasurers.

ICBC and Macquarie were also involved in the deal, sources said. Macquarie has an extensive presence across commodities markets, while ICBC is active in metals as well as crude oil and related refined products, according to the companies' websites. Spokespeople for Deutsche and Macquarie declined to comment. ICBC couldn't be reached for comment.

Deutsche started to shutter most of its commodity business in late 2013 as part of a cost-cutting drive, though the bank said at the time that it would keep its precious metals and financial derivatives businesses. Analysts have speculated that Deutsche might ramp up its presence in commodities once again following a resurgence in its fixed-income division over the past two years and sources say the bank has been considering restarting its base metals trading business.

Sources at Deutsche said the bank was not getting back into energy trading and has no plans to increase its risk exposure in this area. The sources characterised the deal contingent energy transaction as one of a small number of hedging trades that the bank has always provided to corporate clients on an infrequent basis to support its financing business.

Deutsche has an extensive presence in the far larger market for deal contingent FX hedges, where companies and investors engaging in cross-border M&A use derivatives to reduce their exposure to exchange-rate swings between a deal’s announcement and its completion.

The appeal of these derivatives for clients is also what makes them so risky for banks offering the products: the client only has to pay for the hedge if the deal in question completes. In one recent example, Deutsche lost around US$20m on a deal contingent FX hedge following a failed takeover of drug maker Swedish Orphan Biovitrum in December. Barclays lost around US$125m on that same deal, while Morgan Stanley lost about US$20m.

The steep rise in commodity prices over the past year has sparked a wave of corporate hedging – and provided a windfall for banks active in these markets. In one recent example, the then Goldman Sachs’ chief financial officer Stephen Scherr highlighted “materially better performance in commodities” on the bank's third-quarter earnings call amid “the heightened level of volatility in the business, including in oil, natural gas and power".