Interest options

7 November 2008 By Mike Prest

The headline interest rate on the E8.2bn capital injection is only 7%. But when you add in an equity kicker, the effective price is nearly 10%. It still looks a touch less than the 10% minimum demanded by the European Commission but that could easily be fixed.

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Commerzbank's E8.2bn German government bailout has two elements not revealed in the original press release, breakingviews has learnt.

The first is a variable dividendrelated component. No dividends are payable for financial years 2008 and 2009. Thereafter, the coupon payable by Commerz rises by 0.5% for each 25 cents of a dividend. The capital is in two tranches of E4.1bn each. The first tranche will carry a basic coupon of 8.5%; the second, 5.5%. Given that dividends are paid a year in arrears, the first dividend can be paid in 2011.

The second element is that the principal repayment of the second tranches depends on the share price at the time of repayment. It rises by the increase in the share price between E10 and E14.50.

The European Commission is examining the recapitalisation. The Commission said: At first sight the figures do not seem to be in line with German bank rescue scheme approved by the Commission…That scheme provides for a minimum remuneration of such capital of 10%. The German government has said it is confident the scheme complies with the agreement.

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