Bloomberg News

Commerzbank Offers to Buy Back Hybrid Capital Instruments

December 06, 2011

(Updates with analyst comment in fourth paragraph.)

Dec. 5 (Bloomberg) -- Commerzbank AG, Germany’s second- biggest lender, offered to repurchase 600 million euros ($806 million) of hybrid instruments as it boosts capital to meet new requirements for banks in Europe.

Offers will be accepted on a pro-rata basis should they exceed that amount, according to the Frankfurt-based bank. The cash offer covering about 2.23 billion euros of hybrid debt securities starts today and is due to end on Dec. 13, it said.

Commerzbank Chief Executive Officer Martin Blessing, 48, who spent the last three years trying to free the bank from government aid needed to survive the credit crunch, may need to raise 2.94 billion euros to meet new European Banking Authority requirements. While the hybrid buyback will strengthen the core Tier 1 ratio, the bank will need to raise further funds as the offer will also cut overall capital, analysts said.

“This is just a very first step that is expected to be followed by a capital increase,” said Matthias Duerr, an analyst with DZ Bank who recommends buying the shares. “We expect that the bank will announce a capital increase of at least 600 million euros in the next weeks.”

Commerzbank fell as much as 8.2 percent in Frankfurt trading and was 7.1 percent lower at 1.39 euros at 11:24 a.m., giving the company a market value of 7.12 billion euros.

‘Another Step’

“The transaction marks another step in optimizing Commerzbank’s capital structure in light of the transition to the new regulatory requirements of Basel III,” the bank said in a statement. “Execution of the transaction will have a one-off positive effect on the consolidated results pursuant to IFRS and will result in an increase of Core Tier 1 capital.”

Commerzbank offered to repurchase five different securities at prices ranging from 52.5 percent to 40 percent of their nominal value. Hybrid capital combines aspects of debt and equity and allows borrowers to cancel interest and principal payments without triggering a default.

As Europe’s sovereign-debt crisis erodes confidence in the financial system, regulators are pushing the region’s biggest banks to increase their capital buffers faster than the Basel III rules require. Commerzbank may have to raise as much as 5 billion euros in a worst-case scenario, people familiar with the situation said last month.

Capital Increase

“This tender is just a small step to finally close Commerzbank’s capital gap,” said Olaf Kayser, an analyst at Landesbank Baden-Wuerttemberg who recommends buying the shares. “They will need a number of other measures including a reduction of risk weighted assets, but the final step will most likely be a capital increase to bring their capital to the required level.”

Joint dealer managers for the offer are Commerzbank, Credit Suisse Group AG and JPMorgan Chase & Co.

Commerzbank, in which Germany has a stake of 25 percent plus one share, carried out a capital increase of 11 billion euros this year. The lender last week appointed Daimler AG executive Stephan Engels as chief financial officer to replace Eric Strutz, who previously announced plans to leave.

--With assistance from Rajiv Sekhri in Frankfurt and Mariajose Vera in Munich. Editors: Dylan Griffiths, Francis Harris.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Edward Evans at eevans3@bloomberg.net


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