FRANKFURT (Dow Jones)--German bank Commerzbank AG (CBK.XE) said Thursday that it will increase its capital by up to 10% minus one share and repurchase its own hybrid equity instruments in a move to improve its core Tier 1 capital.
It said it reached an agreement with Credit Suisse (CS) whereby Credit Suisse will buy Commerzbank hybrid capital instruments on the market from investors. They will buy these instruments above the current market price, but below par value. Credit Suisse will acquire these instruments through Jan. 21, and then hand over the tendered instruments to Commerzbank and receive shares in return.
In a complicated procedure, Commerzbank will use the tendered hybrid capital as an in-kind contribution for its capital increase.
Under new IFRS reporting standards, 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.
At the same time, Commerzbank will start its bookbuilding for a capital increase and take orders from investors.
A trader said the bookbuilding for Commerzbank's new shares has a price range of EUR5.15 to EUR5.35.
On Jan. 21, when Credit Suisse has finished buying the hybrids on the market, Commerzbank will know how much hybrid capital has been tendered, and thus what the size of the capital increase will be.
People familiar with the matter said the transaction will result in an estimated capital gain of at least EUR300 million and add about 36 basis points to the bank's core Tier 1 ratio, lifting to it around 10.25% from 9.89%. They said the purpose of the transaction was to optimize the bank's capital structure.
Commerzbank has been looking into launching a capital increase since early last year, but so far hasn't been able to pursue a normal process because its share price remained at a low level.
