Commerzbank cuts debt pile to avoid more state aid

Commerz-bank AG moved to fend off government intervention on Monday, saying it would buy back 600 million euros ($806 million) in cut-price debt in a bid to shore up its capital. The partly state-owned bank, which received an 18.2 billion euros bailout in the wake of Lehman Brothers' collapse, is believed to need some 5 billion euros by mid-2012 to meet new capital rules, sources have told Reuters.
Commerzbank's announcement came as Germany, which holds 25 percent of it, moved to reinstate a state rescue fund for banks, sources in the government and the ruling coalition said on Monday. Analysts were sceptical that the bank's action - which comes as others are attempting similar manoeuvres - would be enough to plug the hole in its funding, and its shares dropped 6.6 percent to 1.4 euros by 1210 GMT.
"We expect further capital measures to be announced," DZ Bank analyst Matthias Duerr said in a note on Monday. The Frankfurt-based lender said it would buy back hybrid bonds - a mixture of debt and equity - to generate between 0.2 and 0.3 percent of Core Tier 1 capital.
The bank's core tier one capital ratio was 9.4 percent at the end of the third quarter, but its definition differs from that of the European Banking Authority, which has demanded banks meets a core tier one ratio of 9 percent by mid-2012 in a bid to shock-proof them against a worsening of the financial crisis. The EBA's capital definition is more stringent because it asks banks to re-value European sovereign debt holdings on their portfolios.
At the end of September, Commerzbank had 13 billion euros in exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. The EBA is expected to announce this week the amount of capital each bank must raise - going by the results of a second stress test of 70 banks in the EU - as well as the guidelines for doing so.
Meanwhile, the German government is doing the legal legwork to reinstate its Soffin bank rescue fund as soon as possible and could even reactivate it before Christmas, sources in the government and the ruling coalition said on Monday. "We are eager to set up the legal framework to reinstate the Soffin as soon as possible," said a finance ministry spokesman, while coalition sources said the plan was for the cabinet to decide on this before the holiday.
The tender offer for Commerzbank's hybrid debt starts on December 5 and is expected to end on December 13, Commerzbank said. Joint dealer managers are Commerzbank, Credit Suisse and J.P. Morgan. Commerzbank makes a capital gain because it bought back the hybrid debt at a discount to the original issuance price. The bank hopes to meet the capital needs without needing further state aid, mainly by selling assets.
Commerzbank is part of a surge by European banks to improve their capital ratios by so-called "liability management" measures, to reduce the need to raise equity under the EBA's recapitalisation plan. Spain's Santander and Sabadell on Friday said investors could exchange preference shares for new shares that can be counted as core capital, totalling 2 billion euros and 850 million euros respectively.
Bankia followed on Monday with an offer to buy back up to 750 million euros of subordinated debt and preferential shares, and Portugal's Banco Espirito Santo also made an exchange offer to boost its capital. Britain's Lloyds last week offered to exchange 4.9 billion pounds of debt that could boost its capital by over 1 billion pounds, and BNP Paribas and Societe Generale have also raised capital by the tactic.