Banks buy own debt to raise new capital

EUROPEAN banks are turning to buying back their own debt in order to raise some of the billions in extra capital required by regulators.

At least six major banks have launched debt buybacks in the last two weeks and investment bankers say more are likely.

Barclays announced the repurchase of £2.5bn of its own debt on Monday, following similar moves by Lloyds, Commerzbank, Santander, BNP Paribas and Société Générale.

Most of the continental banks have all completed their buybacks, while the UK lenders are currently in the market for their own bonds.

In Lloyds’ case, it will exchange bonds previously issued for new instruments that are compatible with new regulations.

The move allows lenders to book profits and reduce the stock of non Basel III capital on their books without issuing new equity or offloading assets.

Huw Richards, managing director in debt capital markets at JP Morgan, says that the deals are a major part of capital-raising strategies or “liability management”.

“Liability management will be a key means by which European banks will generate significant core capital while simultaneously managing debt redemption profiles,” he said.

The capital raised in this way is likely to be in the hundreds of millions. It boosts earnings by realising “own credit” gains that are otherwise purely theoretical.

The market price of banks’ debt has fallen dramatically in recent weeks, which enables banks to buy back their debt for an amount above the market price but below the cash they raised by selling the instruments, booking a profit.

However, they could end up having to issue new, more costly debt.

The European Banking Authority has demanded that EU banks raise €106bn in new capital so as to have a core tier one ratio of nine per cent even after sovereign bond write-downs. It will announce the results of its stress tests this evening.