Commerzbank plan to swap debt into shares could be about to hand hedge funds one of their biggest windfalls of the year, after the German bank offered to buy back a slew of bonds at a far higher price than some managers paid for them according to a marketwatch report.
Commerzbank said on Thursday it is offering to swap previously unloved subordinated debt and lower-ranking securities into shares, in an effort to boost its capital by 1 billion euros (849 million pounds) ahead of the European Banking Authority's deadline requiring banks hold core capital of 9 percent. It is the latest of several banks rushing to boost capital by swapping debt for equity. BNP Paribas BNP.PA and Unicredit are among those to have already used cash to buy back their bonds from investors.
Hedge funds have exploited that rush by snapping up the bonds in the secondary market, according to several funds playing the strategy. The funds bet banks would decide to boost higher-ranking capital by buying back junior debt, and that a recovery of confidence in the sector would encourage them to pay a higher price than funds originally paid, giving these investors a profit.
The size of the gain to be made by hedge funds will vary according to the type of security they intend to exchange and the price at which they bought. Some bought Commerzbank bonds for less than 60 cents on the euro late last year, one hedge fund manager said….
Learn more at http://www.marketwatch.com/story/nasdaq-correction-may-be-underway-2012-02-24
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