Two main banks join rush to buy back debt

TWO OF Europe’s biggest banks joined the rush to buy back debt yesterday, notching up transactions worth some $5 billion combined as they scramble to bulk up capital ahead of new banking regulations .

Credit Suisse and Commerzbank follow similar moves by more than a dozen banks across Europe conducting “liability management exercises” designed to ensure they can withstand any future financial crises after many required state aid to keep going in recent years.

The aim in buying back debt at current prices – below those the bank would have to repay otherwise – is to reduce the banks’ exposure to any future liability.

Britain’s Barclays came in for criticism when it was discovered the bank was using tax loopholes to profit further from the bond buyback offer it launched late last year, prompting the UK government to take action.

Commerzbank has struggled to raise cash in an effort to avoid further state aid after being bailed out for €18 billion in the financial crisis.

The bank is paying for its transactions in its own shares in order to boost its Tier One capital ratio but this is proving unpopular with some investors who would rather hold the securities to maturity in order to get the full payment.

Commerzbank had aimed to pocket new capital worth €1 billion via the operation but only managed to secure €776 million. The bank is moving to fill a €5.3 billion gap identified by Europe’s banking regulator EBA and had said last month that it had narrowed the gap to €1.8 billion by the end of 2011.

By comparison, Credit Suisse, whose balance sheet dwarfs the Swiss economy, is using its own capital to buy back securities. It will buy back Tier 1 and Tier 2 instruments worth up to €4 billion Swiss francs ahead of a roadshow for new Contingent Convertible bonds – which convert to equity – early this week.

Credit Suisse and its compatriot UBS are under heightened pressure to issue loss-absorbing forms of capital – replacing other forms that will no longer qualify under the new rules – as they seek to comply with Switzerlands post-crisis capital rules, which are tougher than those laid down by the EU. – (Reuters)