Spain’s Bankia group wants to pay holders of 3 billion euros ($3.6 billion) of its preferred shares most of their money back, though not for years to come, a person with direct knowledge of the matter said.
The preferred shares are loss-absorbing notes whose holders must, under European Union rules, share the burden of rescuing cash-strapped lenders to reduce taxpayers’ contribution to the 100 billion-euro bailout of Spain’s banking system. Forcing losses on the investors is politically sensitive because most were retail clients of the troubled savings banks merged into Bankia group in December 2010.
Under the plan, Bankia’s preferred shareholders would receive new securities with a lower yield straight away, plus cash or shares in future years, said the person, who asked not to be identified because the proposal isn’t public. The payments would get close to the notes’ full face value, though spreading them over time means they’re worth less, helping Spain comply with EU rules limiting how much rescued banks can pay creditors, the person said.
“It seems to be more marketing than anything else,” said Arturo Bris, a professor of finance at the IMD business school in Laussanne, Switzerland. “A larger amount in the future is, in reality, the equivalent of a smaller amount today, though it could make it easier for retail clients to accept the haircut.”
Talks to Proceed
Bankia group proposed the compromise to the European Commission, which will now negotiate with the Spanish government and central bank, the person said. A spokesman for Bankia group, who asked not to be identified citing the lender’s policy, declined to comment.
Concern over the fourth largest euro-region economy’s ability to fund the rescue of its banks and regional governments sent Spain’s 10-year bond yield surging to a record 7.751 percent today. The cost of insuring the nation’s debt also jumped to an all-time high, with credit-default swaps on Spain rising to 647 basis points, implying a 43 percent chance of default over five years.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a swap protecting $10 million of debt for five years is equivalent to $1,000 a year.
How much investors get under Bankia group’s proposal will depend on what its preferred shares are currently valued at. That’s because EU banks rescued using taxpayer cash can’t repay preferreds or other junior debt at more than 10 percent higher than where they’re trading.
Bankia’s preferreds, which were issued by the Caja Madrid savings bank in 2009, last traded at 45 percent of face value on July 11, according to the Bolsas y Mercados Espanoles SA stock exchange. Most of the preferred shares of other lenders merged into Banco Financiero y de Ahorros SA, or Bankia group, have already been redeemed or swapped into new notes.