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?