(Bloomberg) — Deutsche Bank AG’s investment banking woes were exacerbated by a stock sale gone wrong in the U.S., according to a person with knowledge with the matter.
Germany’s largest lender reported a 50 percent drop in equity origination revenue during the first quarter and said it was because of losses on a block trade. It took a roughly 38 million-euro ($46 million) hit tied to a block trade in February for Dominion Energy Midstream Partners LP, in which the bank served as sole bookrunner, the person said.
Dominion Energy Midstream’s shares crashed in March after a U.S. agency issued a surprise reversal of a longstanding policy that had allowed Dominion and similarly structured entities to claim certain tax credits.
With block trades, a seller typically gathers bids from banks for shares it wants to unload, often at a haircut to the stock’s most recent price. The winning bank or consortium looks to resell those shares for a bit more than it paid, ideally within hours. Mandates for block trades are hotly pursued by investment banks because the transactions offer opportunities for quick profit, and for the league-table credits they offer.
The business all boils down to an educated bet, because banks usually can’t line up buyers in advance — and sometimes things go wrong.
Dominion Energy Midstream — which stores, ships and processes natural gas, among other things — is structured as a master-limited partnership, a pass-through entity that pays no federal taxes. MLPs have helped investors get better after-tax returns than by investing in conventional corporations. The Federal Energy Regulatory Commission decision in March came in response to a court ruling that found the longstanding policy could result in double-recovery of costs for these partnerships.
The company’s shares plunged after the decision and are now down more than 40 percent since then.
Deutsche Bank ranked seventh in arranging equity sales globally this year, according to data compiled by Bloomberg. The bank said Thursday it would restructure its investment banking division and scale back U.S. rates sales and trading, reduce the corporate finance business in the U.S. and Asia, and review its global equities business with a view toward cutting back.
Financial News reported earlier Thursday that the loss was tied to Dominion.