FRANKFURT—German bank Commerzbank AG on Thursday said it will raise up to €650 million ($853.6 million) in new capital by exchanging hybrid bonds for new shares, resulting in a capital gain and an increase to its core Tier 1 ratio.
The move is the latest by a European bank to boost its capital ratios in advance of stricter regulatory requirements. The bank has been considering a capital increase for about a year, but hadn't been able to make an outright sale of new shares because of its depressed share price.
A Commerzbank spokesman said the bank "is neither planning to raise further equity capital nor to announce further capital raising initiatives in the first quarter of 2011."
"We may, however, consider implementing further capital measures in the future," the spokesman said.
In a complicated transaction announced Thursday, Credit Suisse will buy Commerzbank preferred securities, a type of hybrid capital, on the market from investors at prices above current trading but below par value. Once the tender closes Jan. 21, Credit Suisse will hand over the tendered instruments to Commerzbank and receive shares in return that it will place with investors.
Under new capital requirements that will be introduced as Basel III, hybrid instruments can't contribute to a company's core Tier 1 capital, so by swapping the hybrid capital for new shares, Commerzbank's core Tier 1 capital can be improved.
The transaction will increase Commerzbank's roughly €6.5 billion share capital by up to 10%, minus one share, the bank said. The German government, through its German Financial Market Stabilization fund, SoFFin, has committed to maintain its 25% plus one share stake by converting silent participations it holds into shares. SoFFin plans to keep a blocking minority in Commerzbank.
People familiar with the matter said the transaction will result in an estimated capital gain of at least €300 million from buying the hybrid bonds back at a discount. They said it will add about 0.36 percentage point to the bank's core Tier 1 ratio, lifting to it around 10.25% from 9.89%.
The transaction will take some €1 billion worth of hybrid debt issued by Commerzbank off the market and replace it with 10% minus one share of equity capital, one person familiar with the matter said.
The transaction highlights the steps banks are taking to improve their capital structures before Basel III regulations crafted by the Basel Committee on Banking Supervision come into effect over the next several years.
The new shares are being offered at between €5.25 and €5.35 each, one person familiar with the matter said. Earlier Thursday, the range was between €5.15 and €5.35 each, according to people in the market. Analysts said the shares fell due to concerns that future earnings-per-share will be diluted by the capital raising measures.
One analyst estimated that the bank's number of shares will be diluted by 12.5%. That is because SoFFin plans to keep a blocking minority after the capital increase and, to that end, will convert part of the silent participation it holds into equity, on top of outstanding hybrid debt that will be used as an in-kind contribution for the capital increase.
Several analysts noted that the transaction, albeit small, makes economic sense, as hybrid debt will be bought back substantially below par value while new shares are being issued at par value. However, Commerzbank's actual challenge of a substantial capital increase with fresh capital and a repayment of government debt "is still far away," said one analyst.
— Olaf Ridder in Frankfurt contributed to this article.
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