Nov. 30 (Bloomberg) -- Fortis, part of the group that bought ABN Amro Holding NV in Europe's biggest-ever banking takeover, is raising 2.5 billion euros ($3.7 billion) by selling bonds convertible into shares to help pay for the purchase.

Fortis, the biggest Belgian financial-services company, paid 24 billion euros for ABN's Dutch consumer-banking arm and its asset-management and private-banking units, as part of a 71.5 billion-euro acquisition. Ping An Insurance (Group) Co. yesterday bought a 4.2 percent stake in Fortis for 1.81 billion euros in the largest overseas acquisition by a Chinese insurer.

The Fortis bonds will pay annual interest of 175 basis points to 250 basis points more than the euro interbank offered rate, or Euribor, Fortis said today in an e-mailed statement. The notes can be swapped for shares of Fortis if the stock rises 30 percent to 35 percent from current market prices.

``For the bank it's not really that expensive in relative terms and considering sentiment, and it delays stock dilution,'' said Rossitza Haritova, a convertible bond analyst at Nomura International in London.

Fortis's existing 1.25 billion euros of undated convertible floating-rate notes sold in 2002 plunged 13 percent to 90.25 cents on the euro today, from as much as 130 cents in June, according to Goldman Sachs Group Inc. Investors sold the bonds to buy the new issue because it offers better value, according to Grant Mackie, an analyst at Lehman Brothers Holdings Inc. in London.

Banco Santander

Fortis, based in Brussels and the Dutch town of Utrecht, will pay between 6.56 percent and 7.31 percent in annual interest on the bonds, based on Euribor.

That compares with a coupon of 7.5 percent for the first year on 7 billion euros of convertible notes sold last month by Spanish lender Banco Santander SA for its part of the ABN acquisition that was led by Royal Bank of Scotland Group Plc. Santander will pay 275 basis points more than Euribor in subsequent years.

Citigroup Inc. is paying 11 percent interest on $7.5 billion of convertible securities that the biggest U.S. bank sold to the Abu Dhabi Investment Authority this week.

Fortis said in September it has ``some exposure'' to the U.S. subprime market through its holdings of mortgage-backed and asset-backed securities and collateralized debt obligations. The bank this month reported an unexpected decline in third-quarter profit caused by increased borrowing costs and rising U.K. flood-insurance claims.

`Suspicious' Market

``Given the issues Fortis has regarding disclosure of its exposure to subprime and the like, the fear was that they would have to pay even more'' to borrow, said Chris Hitchings, an equity analyst at Keefe, Bruyette & Woods Ltd. in London. ``In a market that's suspicious of banks, people are most suspicious of the ones that have the poorest disclosure.''

The London interbank offered rate that banks charge each other for euro loans due after the end of the year jumped 97 basis points this week to 4.81 percent, the highest since May 2001, the British Bankers' Association said.

Fortis shares have fallen 32 percent this year, compared with a 14 percent decline in the 63-member Bloomberg Europe 500 Banks and Financial Services Index. The stock dropped 21 cents, or 1.1 percent, to 18.30 euros in Brussels.

New Issues

Chief Financial Officer Gilbert Mittler said earlier this month Fortis will probably issue as much as 4 billion euros of securities ``by the end of 2007 or early next year.''

The company completed the sale of 13.4 billion euros of stock last month and has also sold 2 billion euros of bonds and assets including its stakes in Banco Comercial Portugues SA and Kas Bank NV. Fortis also took out a 10 billion-euro bank line known as a revolving credit facility last month.

The convertible bonds ``will complete the equity and equity-linked components of Fortis's acquisition financing plan,'' Mittler said in the statement today.

Banks are using equity-linked bonds because they help build the capital reserves required by regulators to protect depositors against losses, known as Tier 1, according to Lehman's Mackie. ``For the financial sector, Tier 1 capital is vital right now,'' Mackie said in a phone interview.

The new Fortis bonds will automatically be converted into stock at a price 50 percent higher than the stipulated exchange price. They rank equally with the existing undated convertible notes, known as Fresh.

JPMorgan Chase & Co. and Merrill Lynch & Co. are managing the sale, helped by Fortis Bank. Merrill, which advised on the ABN Amro takeover in September, also ran the sale of 4.7 billion euros of Fortis stock, the biggest equity underwriting commitment in Europe this decade.

Fortis has given Merrill and JPMorgan the option of buying another 500 million euros of the convertible securities, taking the bond sale to as much as 3 billion euros.

To contact the reporter on this story: Martijn van der Starre in Amsterdam vanderstarre@bloomberg.net; John Glover in London at johnglover@bloomberg.net

Last Updated: November 30, 2007 11:58 EST