Commerzbank AG said Monday it will pay up to €600 million ($805.7 million) to repurchase trust-preferred securities in a move to improve its core capital as the bank struggles to meet capital requirements for European banks.
"The transaction marks another step in optimizing Commerzbank's capital structure," the bank said regarding the measure, aimed at increasing its core Tier 1 capital. It will also lift consolidated results due to a book gain.
Although viewed as an overall positive step that will raise core capital and decrease debt, analysts said they doubt the transaction is enough for Commerzbank to overcome a looming shortfall that has fueled speculation the bank may need to resort to accepting state aid.
The transaction decreases ordinary Tier 1 capital. But because the amount being paid would be about 40% to 52.5% of the nominal value of the securities, the move would result in a book gain of up to €600 million, which would be calculated as part of the bank's core Tier 1 capital. The offer allows Commerzbank to buy back about €1.2 billion of an aggregate €2.23 billion hybrid securities outstanding, a spokesman said. For investors this still seems like a good deal since the securities are currently trading at 35% to 43% of their values.
Despite being seen as a good move, Commerzbank's shares tanked Monday, falling over 7% intraday. They had recently recovered somewhat, down 3.3% at €1.45, while the DAX was up 1.1%.
DZ Bank analyst Matthias Duerr called the measure "clearly positive," but not enough to relieve the pressure on Commerzbank. He expects the bank will have to launch a capital increase of about €600 million in coming weeks. "We doubt that Commerzbank will get BaFin [regulatory] authorization for such pure cash tender as it reduces the total amount of capital stock," Mr. Duerr said.
LBBW analyst Olaf Kayser also sees Monday's measure as a first step that could be followed early next year with a capital increase of €1 billion to €2 billion.
Like other European banks, Commerzbank has to raise its core Tier 1 capital ratio to 9% by June 2012 according to guidelines from the European Banking Authority. In coming days the EBA is set to announce how much of a shortfall banks have to cover. In October, Commerzbank estimated its shortfall at €2.9 billion, but markets expect the new figure will be much higher.
The transaction comes on the heels of a report in magazine Der Spiegel saying Germany is prepared to step in to nationalize Commerzbank, which many consider won't be able to cover its shortfall without state assistance. The government already holds a stake in Commerzbank of 25% plus one share and the bank has repeatedly said it has no intention of asking for more help. The bank and the Finance Ministry declined to comment on the report Monday.
"All that can be said on this issue is that EBA soon will communicate the capital needs of banks, and as long as that hasn't happened, nothing can currently be said on the issue," a finance ministry spokesman said.
Commerzbank's plan follows similar moves by banks elsewhere in Europe that have aimed to benefit from falling debt values. A slew of banks across Europe have recently swapped subordinated debt for more senior debt, and preferred stock for new shares. Many of these instruments were trading at deep discounts and were difficult to sell for its holders, giving them a strong incentive to accept the offers by banks.
Banks, in turn, are able to exchange lower-rated capital instruments for new shares without having to offer investors the sort of deep discounts that would apply if they were to launch a rights issue.
"Given the premium (Commerzbank is offering), the current uncertainty and the name, we would expect a higher take-up than for other recent LMEs [Liability Management Exercises]," BNP Paribas said in a note. "Even more importantly, we think that this exercise may mean that BaFin changed tack regarding LME. Until now, our understanding was that they were reticent to any reduction in capital, even if it meant creation of better quality capital."
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