Bankia Depositors Buying Bonds Leave Spain on Bailout Hook

Bankia Tapping Depositors for Bonds Leaves Spain on Bailout Hook
The headquarters of Bankia SA rises above residential apartments in Madrid. Photographer: Angel Navarrete/Bloomberg

Spain’s hands are tied with the rescue of Bankia because alternatives to injecting cash or government debt, such as forcing bond investors to bear the cost, risk hurting ordinary depositors.

Bankia is among Spanish lenders that sold 22.4 billion euros ($28.2 billion) of preferred stock to individual investors through retail branches, according to data compiled by CNMV, the financial markets supervisor. In a so-called bail in, these investors would be wiped out before holders of more senior bonds, which tend to be banks and institutions.

When Ireland eased the burden on taxpayers of bailing out its banks by making bondholders take losses three years ago the move was politically palatable because it was lenders and fund managers taking most of the pain. This isn’t feasible for Spain and the government is instead considering recapitalizing Bankia group by injecting cash or government debt.

“The sale of preferred stock to depositors means that almost the only option for the government now is injecting capital,” said Arturo Bris, a professor of finance at IMD business school in Laussanne, Switzerland. “A writedown of preferred shares placed with depositors would cause a social problem. It’s not really a feasible alternative.”

A spokeswoman for the Spanish economy ministry had no immediate comment. A Bankia spokesman, who declined to be identified, wouldn’t comment.

Spreading Pain

The government nationalized Bankia on May 9, leading the lender with the biggest Spanish asset base to request 19 billion euros of state backing to clean up bad loans to borrowers such as property developers. That’s on top of the 4.5 billion euros of Bankia preference shares the government has already bought. Spain’s also considering guaranteeing joint regional bond issues with tax revenue, three people familiar with the plans said.

The burden all this puts on Spain pushed the extra yield that investors demand to hold the nation’s 10-year notes instead of benchmark German bunds to a record 5.16 percentage points. Bankia lost 12.5 percent of its value today, bringing its decline this month to 54 percent.

A taxpayer-funded bailout of Bankia would foist losses on a wider portion of society than making individual bondholders, many of them depositors, lose money.

Junior Impairments

Banco Financiero y de Ahorros, the holding company of publicly traded Bankia, has 8.7 billion euros of junior subordinated bonds and preferred stock outstanding that can be swapped into equity, data compiled by Bloomberg show. It also has 3.75 billion euros of senior subordinated debt and 24 billion euros of senior bonds, which typically can’t be touched until more junior notes have been impaired.

Caja Madrid, the largest of the seven troubled savings banks that were restructured into Bankia, alone issued 3 billion euros of preference shares bought by investors including depositors in 2009, Bloomberg data show.

Fernando Herrero, the secretary general of ADICAE, a Madrid-based association of clients of financial institutions, estimated that about 1 million Spanish households bought banks’ preferred shares, some of which have been converted to common equity or subordinated convertible bonds.

‘Original Sin’

“The instruments were marketed as very liquid and as safe as a deposit,” said Herrero, who described issuing the risky securities to individual investors as an “original sin.”

Bankia Chairman Jose Ignacio Goirigolzarri said May 26 that the lender is working on a “solution” to the problem of the preferred shares that may be ready before a shareholder meeting scheduled for June 29.

Spain’s preferred option for recapitalizing Bankia group is to raise funds for the lender in debt markets, a government spokesman said today. Handing it government bonds, which an official said yesterday was under consideration, is now a “marginal” option, said the spokesman, who declined to be named. Such debt could be used by Bankia as collateral for a loan from the European Central Bank.

“I’m not sure that the ECB’s northern European membership will be very happy about the central bank taking on that credit risk,” said Paul Smillie, a credit analyst at Threadneedle Asset Management Ltd. in London, which oversees about $43 billion of fixed-income assets. “I’m not sure how workable the idea is.”

Buyback Leftovers

About 4.5 billion euros of preferred shares issued to Spain’s bank rescue fund, known as FROB, and due to be converted into equity are included in BFA’s so-called Tier 1 capital. There are also small portions of more than 20 junior subordinated notes, some left outstanding after buybacks, taking Bankia’s total junior subordinated debt to 8.7 billion euros, Bloomberg data show.

That leaves Spanish taxpayers on the hook for Bankia’s recapitalization, said Threadneedle’s Smillie.

“Either Spain pays or there’s some sort of funding from the center, from Europe,” he said. “You’ve got to pay for it somehow and if the private capital isn’t there the government has to step in.”

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