Commerzbank’s mind-numbing cash call | FT Alphaville

Commerzbank’s mind-numbing cash call

Is this the most complicated cash call of recent times ever?

Judge for yourself.

Presenting Commerzbank’s €11bn capital increase (click the image for the term sheet):

Now if we are reading this correctly — something that’s not helped by the fact you can’t access the press release from outside Germany for some arcane regulatory reason — Commerzbank is planning to do the following:

–  Raise €3.5bn -€5.4bn via a bookbuild of conditional mandatory convertible notes, or CoMEN (some of which will end up in the hands of SoFFin, the German state’s banking rescue fund). The CoMEN  will convert into ordinary Commzerbank shares after the AGM, scheduled for May 6. They will be priced on April 13, with settlement on April 18.

– Commerzbank will then raise a further €6.5bn-€7.5bn from a rights issue (SoFFin will take of €1.6-€1.9bn of that).

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On top of all that, Commerzbank is also planning to raid its coffers for an extra €3.27bn. So that gives a grand total of €14.3bn, which will be used to buy back a large chunk of the €16.2bn of the stille Einlagen (silent participations) — hybrid capital provided by SoFFin to prop up the bank.

There will also be a one-off payment to SoFFin of € in Q2 for early repayment of the stille Einlagen.

Post these manoeuvres — which won’t be completed until early June — Commerzbank will have a core Tier 1 capital ratio of 8.3 per cent, which isn’t that great.

Ten per cent is still seen as the right number going into Basel III say traders and its worth noting the €5bn capital raise from Intesa Sanpaolo (also announced today) takes the Italian’s bank’s core Tier 1 to 10 per cent.

All of which means there could be another cash call and SoFFin’s stake (25 per cent plus one share) is still overhanging the market.

The fund raising, of course, is also massively dilutive, says Landesbank Baden-Württemberg:

The huge amount of the capital increase surprises us. We had never expected such an amount at the current low share price. We calculate an increase in the number of shares by more than 3 billion. Therefore, the total number of shares will rise from 1.33 bn to a range of between 4.3 and 4.9 bn. In our view this transaction will be highly dilutive. We accordingly put our rating and target price under review.

Still the shares are trading slightly higher in early trading, probably a reflection of the large short base in Commerzbank – reckoned to be around 13 per cent of its share capital – and today’s trading statement, which is ahead of budget (although below the recent stellar run rates).

And some brokers like JPMorgan (admittedly one of the book runners) are rather pleased with how it’s all worked out:

We estimate Commerzbank’s capital will increase post transaction from €11.7bn in 2012e to €23.7bn due to capital raising and accumulated earnings, provided transaction is successful. As a result the B3 2012 core Tier 1 ratio improves from 4.1% (we do not consider Soffin as capital in our calculations) currently to 8.3%, in line with our required B3 capital requirement of 8.3%. We believe that the capital rising markedly improves the financial health of the company, reducing its reliance of government support.

Update: 10:32
RBS is surprised by Commerzbank’s decision to pay out 3.2bn of excess capital so close to the European fudge stress test.

We are surprised at Commerzbank’s determination to pay out EUR3.27bn of excess capital just a few weeks before the European banks stress test. Management must be fully convinced that it will pass the stress tests even after the payout. In our view, the German regulator (who we assume would have vetted the new target capital structure) is actually happy with this level of capital for German banks. This should provide relief to Deutsche Bank, which had 8.7% equity tier 1 at 12/2010 and which we expect will have around 8.5% equity tier 1 under Basel 3 in 2013.

Related link:
Commerzbank to repay €14bn state aid – FT