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Commerzbank Sells Shares, Plans Debt Buyback to Prepare for Basel III

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Commerzbank AG, Germany’s second- biggest lender, plans to boost capital by buying back debt as it prepares for new banking regulation. The lender raised 626 million euros ($833 million) by selling 118 million new shares at 5.30 euros apiece to fund the debt purchase, it said in a statement. Commerzbank will buy back hybrid equity instruments at prices below par in a tender offer managed by Credit Suisse Group AG, the company said.

The lender, which was forced to tap Germany for 18.2 billion euros of aid, may book a one-time capital gain of as much as 340 million euros, according to two people with knowledge of the transaction, who declined to be named because the talks are private. The deal will boost Commerzbank’s core Tier 1 ratio, a measure of financial strength, to 10.25 percent from 9.9 percent, they said. Reiner Rossmann, a spokesman for Commerzbank in Frankfurt, declined to comment on the gain.

“While this is not the major coup to pay back state aid, Commerzbank is making use of the low valuation of its hybrid instruments,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. who recommends selling the stock. “The transaction will lead to a one-time gain for Commerzbank this year and also help lower future coupon payments and it also helps improve their capital quality.”

Soffin Stake

Germany’s Soffin financial-rescue fund plans to keep its holding of 25 percent plus one share in the lender upon completion of the capital increase, according to today’s statement. The fund will convert its so-called silent participations into shares to maintain the stake.

European banks are seeking to improve capital levels after leaders of the Group of 20 nations in November endorsed rules, known as Basel III, which will more than triple the highest- quality capital that banks must hold. Deutsche Bank AG, Germany’s biggest bank, raised 10.2 billion euros in a share sale in October. Commerzbank declined 15 euro cents, or 2.7 percent, to 5.49 euros as of 4:40 p.m. in Frankfurt trading, giving the lender a market value of about 6.5 billion euros. The new shares were sold at a 6 percent discount to yesterday’s closing price, with demand outstripping supply in the offering.

Tier 1 Capital

Zurich-based Credit Suisse, Citigroup Inc., Goldman Sachs Group Inc. and UBS AG were selling the shares to institutional investors today, according to Commerzbank. Allianz SE, the second-largest shareholder in the bank, agreed to provide Credit Suisse with a stock lending facility of existing Commerzbank shares, allowing investors to borrow them until delivery of the new shares, the Swiss firm said in a separate statement today. While the transaction will not have “any noticeable impact” on the bank’s Tier 1 capital ratio, it will result in an increase of core Tier 1 capital, the lender said. Both ratios are a buffer against possible losses. The core Tier 1 capital excludes several capital instruments. Commerzbank isn’t planning to raise any further capital in the first quarter, but may consider measures in the future, it said in a separate statement.

“If a large-scale equity raise fixes the capital base properly, it could attract decent demand, as it would create a large benchmark stock and the only quoted retail/commercial bank in the eurozone’s biggest and strongest economy,” Barclays Capital analysts including Jeremy Sigee wrote in a note today. “In such a context, Commerzbank could become a must-own stock in the sector or at least a must-consider, which is the polar opposite of where we see the stock now.”

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