Wednesday, 16 February 2011

Yet another debt for equity swap by a bank

From the FT:

Commerzbank has taken long-awaited action to shore up its capital base, buying back some of its debt and issuing €626m ($835m) of shares...

Banks led by Credit Suisse on Thursday completed a quick placement of 118m Commerzbank shares, equivalent to almost 10 per cent of the bank’s capital, at €5.30 per share...

Some of the debt instruments in the buy-back offer trade at steep discounts to par value, partly because European competition authorities have stopped Commerzbank from paying the interest due on the debt as a condition for approval of the state aid given to the German bank...

Commerzbank will further benefit through buying back its debt at a discount. Analysts at Barclays Capital estimated that Commerzbank would book a post-tax gain of about €200m from the deal.

So this is the non-enforced (and hence the best) variation on the theme. The bondholders, who are sitting on unrealised losses, just sell their bonds at market value; the bank which buys back the bonds can book the bondholders' loss as their own profit (that's how accounting rules work!), so that profit counts as 'equity'.

The bank raises the money by issuing new shares for a similar value, so a bondholder is perfectly entitled to swap some of his devalued bonds into shares by selling the former and buying the latter.

Hey presto, the bank's capital ratio has improved a bit, risk/cost to taxpayer and depositors reduced and nobody has incurred any further losses; and if the bank's position improves in future, those who lost money on the bonds will make it back on the shares.

What's not to like?


Scott Wright said...

"What's not to like?"

I have come to the realisation that what is NOT to like about sensible policies & solutions to problems is they show how much government is not really needed in its present bloated form.

What's not to like is that by sorting out banks like this and NOT using taxpayer money to bail them out, you can't bash the banks as much and blame them for simply acting as bankers do, in their own short term financial interests.

Bayard said...

So it appears that the sensible D4E club includes Denmark and Germany and the stupid bailout club includes us, Ireland? Greece and Portugal? Perhaps PIIGS should be PIIGSUK. What did Iceland do?

chefdave said...

I was thinking about something like this a few weeks back, couldn't account holders trade a portion of their balances for equity thus repairing their bank's battered balance sheet?

The upshot is that they ultimately take a haircut as the asset side finds market value, but it would be better than losing the lot.

Mark Wadsworth said...

SW, a bit of both, then?

B, Germany did a heck of a lot of bailing out, this is a blip in an otherwise sordid record. Iceland went one better and just allowed their banks to collapse, heck knows how many pence in the £ their investors got back or will get back. That's why they're already out of recession again.

CD, you have thereby invented another variation of the D4E. not difficult, is it? PS, no way would depositors have lost the lot.

Bayard said...

After all this fun is over it should be possible to put a list together of countries ruled by their bankers and countries ruled by some other organisation. I suppose you could also make a list of countries rulled by their democratically elected representatives, but it would be very short.