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Caja Madrid, BFA Credit Ratings May Be Lowered on Bank Plan

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April 8 (Bloomberg) -- Caja Madrid and Banco Financiero y de Ahorros SA may have their credit ratings cut because of a plan to set up a so-called bad bank to hold riskier assets, Standard & Poor’s said.

The A- ratings of Caja Madrid and BFA have been placed on “creditwatch with negative implications,” S&P said in a statement late yesterday. BFA “will likely operate as a quasi-holding company” that holds some of the group’s “risky assets” and assume a “significant amount” of the group’s debt under the plan announced on April 5, it said late yesterday.

“In our view, this new plan could affect the creditworthiness of both Caja Madrid and BFA and raises significant uncertainties,” the ratings company said.

Spanish savings banks, which have recognized almost half of their 217 billion euros ($313 billion) in loans to builders and developers as “potentially problematic” after the collapse of a property boom, are racing to raise funds to meet new capital requirements before a September deadline set by the government. Under Caja Madrid’s plan, preference shares owned by the state’s bank-rescue fund will be bundled into BFA along with the riskier assets.

Bankia Unit

The government, which is tightening rules on lenders as part of its efforts to restore investor confidence, has declined to comment on the detail of Caja Madrid’s plan, even as it says the state will make a profit on its preference shares. Finance Minister Elena Salgado said on April 6 it was up to the Bank of Spain to evaluate the plan. The Bank of Spain has set itself a deadline of April 14 to approve or demand changes to the recapitalization plans of 13 savings-bank groups including Caja Madrid.

The gap between Spanish and German borrowing costs narrowed to 178 basis points today, compared with 182 basis points yesterday. A basis point is 0.01 percentage point.

The group formed from a merger of seven savings banks plans to list a unit called Bankia, with assets of 275 billion euros, on the Madrid stock market while leaving foreclosed land, substandard loans on land, some share holdings in other companies and enough cash to meet payments in the hands of BFA. BFA remains the only shareholder in Bankia until the initial public offering. Chairman Rodrigo Rato denied on April 6 that Bankia was setting up a “bad bank.”

Caja Madrid is following steps taken by Barcelona-based La Caixa, which said in January it would transfer its banking business into a publicly traded holding company, Criteria CaixaCorp SA, while keeping the riskier assets in an unlisted unit. Criteria shares have risen 17 percent since that plan was announced.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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