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Bankia’s Junior Bondholders Said to Face Losses of 50%

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Nov. 16 (Bloomberg) -- Spain may force holders of junior bonds issued by Bankia group, the country’s biggest nationalized lender, to take losses approaching 50 percent of the face value of their securities, two people with knowledge of the plan said.

The government-owned bank plans to reduce the value of its most junior debt, known as Tier 1 securities, by almost half, with lower losses for its other subordinated bonds, said the people, who asked not to be identified because investors haven’t been informed. Holders of debt from other nationalized lenders face similar so-called haircuts, the people said.

Such burden-sharing is controversial because the debt includes preferred shares, which were marketed to ordinary depositors as safe yet high-yielding investments as late as 2009. Spain is taking this step to satisfy conditions of the 100 billion-euro ($127 billion) international bailout of the country’s banking system agreed with the European Union.

“To know what haircuts will be applied to nationalized lenders is key for investors in Spanish distressed assets since it sets a benchmark,” said Francesco Marani, a fixed-income trader at Auriga Global Investors SV SA in Madrid.

Simon O’Connor, a spokesman for European Union Economic and Monetary Affairs Commissioner Olli Rehn, declined to comment. A Madrid-based press officer at Bankia also declined to comment.

Spain agreed to impose losses on holders of rescued banks’ junior debt in the Memorandum of Understanding for the financial-system bailout that it signed with the EU on July 20. What hasn’t been announced is how big those losses will be.

The haircuts for Bankia group’s Tier 1 notes will be realized by exchanging the debt for stock, the people said. The Madrid-based lender will offer to swap the notes in a voluntary tender, followed by a mandatory exchange if there’s insufficient take-up, they said.

Among Bankia group’s Tier 1 securities are 3 billion euros of 7 percent preferred shares issued by Caja Madrid in 2009, according to data compiled by Bloomberg. Bankia group was formed from a merger of troubled savings banks that buckled under the weight of a decade of bad real estate loans.

To contact the reporter on this story: Esteban Duarte in Madrid at

To contact the editor responsible for this story: Paul Armstrong at