Juggling stakeholders: Commerz turns around

After struggling during the financial crisis, Commerzbank’s capital markets transactions this year have shown a determination to draw a line under its troubles. With the German bank’s debt-for-equity exchange having impressed DCM bankers, Katie Llanos-Small reports on its plans for future liability management work.

  • 28 Sep 2011
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As Commerzbank’s intensive efforts to recover from the bruising financial crisis began to pay off in early 2011, it added a flourish. An ambitious liability management exercise would boost its core capital, giving regulators, and increasingly the market, more of what they wanted to see — equity.

The debt-for-shares swap required careful planning to satisfy the demands of multiple interested parties: the government, the regulator, the European Commission and, of course, the bank’s

The exchange of hybrid securities into equity impressed the market. Debt capital market syndicators and originators voted Commerzbank top borrower for liability management in EuroWeek’s bond awards in May 2011.

The financial crisis hit Commerzbank hard. After taking over Dresdner Bank in the dark days of September 2008, the lender was unable to shake a string of quarterly losses until early 2010. It sucked up some €16.2bn of state capital in the process.

Undeterred, in May 2009 senior management set out a three year plan to exit the crisis, acknowledging the dual challenge posed by the dire economic backdrop and acquisition of Dresdner. Once the bank returned to profit in 2010, it looked at shaking off its government support.

Seeking sign-off

This year’s aggressive capital raising plan allowed the bank to rid itself of most of the silent participations injected by Germany’s Financial Market Stabilisation Fund (SoFFin), although the government retains a 25% plus one stake in the bank.

The bank used an innovative, two-pronged structure to repay €14.3bn of state aid it received in the form silent participations during the crisis, turning an almost impossible capital raise — €11bn on a €7bn market capitalisation — into manageable chunks that gave investors clarity over the entire process. It raised €5.7bn in the first step through a quasi-equity issue — of conditional mandatory exchangeable notes (CoMens) — which it converted into equity after a shareholder approval process. It then in May launched a conventional rights issue to raise €5.3bn from its now-expanded capital base, with the state participating to maintain its 25% plus one share directly held stake in the bank. The deal raised its equity tier one ratio from 4.3% to 8%.

Before that, Commerzbank looked to other parts of the capital structure. Offering to buy back hybrid securities that are trading well below par can be a straightforward method to book a capital gain. But in this case, getting regulatory sign-off was not so simple because of Commerzbank’s use of state funds during the financial crisis.

One banker familiar with the exercise says that although the below-par repurchase was in effect a haircut on subordinated debtholders, the regulator had initially been reluctant to see these investors taking money out of the bank.

The bank raised €626m through a rights issue and used the funds to buy back trust preferred securities which had been trading at deep discounts to par. The exercise, which added 40bp to the bank’s core tier one ratio, was structured in two steps to avoid triggering dividend stoppers and pushers on the hybrids.

"We looked at this exercise given the greater weight regulators and rating agencies are now putting on common equity, as opposed to hybrid capital," says Doerr. "Given the market situation with the trust preferreds trading at quite a price below par, this deal, which involved raising capital to issue shares against payment in kind in form of the trust preferreds, seemed reasonable."

Commerzbank is usually viewed as a sophisticated but infrequent borrower in the debt markets. Its only public senior unsecured trade this year has been the €500m re-opening of a 2017 issue in February. The bank initially sold that trade in March 2010 as part of an effort to build out its curve, culminating in a €1bn 10 year issue in September the same year.

Holistic approach

The bank returned to liability management again in March this year, this time offering holders of tier two instruments, which it was not expected to call, to swap into new issues that are likely to be grandfathered under Basel III rules.

The exercise showed the borrower’s turnaround story had been widely accepted by investors, Doerr says. But whether the bank returns to LM depends on a multitude of factors.

"We look at our capital structure from various angles, and we always watch out for any opportunistic measures we can do that also make sense for the bank from a strategic perspective and give benefit for investors," he says.

"We might have investors that are willing to leave a position at a certain level, if it makes sense for them from an economic point of view. But besides overall economics, we will always take into account the short term impact on our capital structure as well through the transition period under CRD IV."

A holistic approach is critical when it comes to planning LM — but the final structure must be as simple as possible, he says.

"It is a matter of finding a structure that creates a win-win scenario. Behind the scenes there are additional impacts to be taken into account, such as effects under the applicable accounting framework under IFRS and German GAAP. If you consider all that, and the evolving regulatory framework, that gives you a position to move forward."

  • 28 Sep 2011

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