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SNS Junior Bonds Stem Decline on Speculation It Will Sell Stake

SNS Reaal NV’s subordinated bonds rallied, stemming a decline of as much as 29 percent since Jan. 10, amid speculation the Dutch bank and insurer will be able to sell a stake and avoid taking a bailout.

The company’s 250 million euros ($336 million) of 6.26 percent undated junior subordinated notes gained 5.08 percent to 38.88 cents on the euro, after falling to as little as 36.34 cents last week. The Utrecht-based bank said today it’s seeking “a comprehensive solution” to its capital shortfall, involving a share issue and transactions in outstanding subordinated bonds.

“The small rally was on the back of press reports that SNS was talking to potential investors in the private sector,” said Simon Adamson, an analyst at CreditSights Inc. in London, who said there is too much uncertainty for the junior bonds to be attractive. “I can’t think why a private investor would get involved at this stage. Some form of state capital and/or guarantee seems inevitable to me.”

Losses on real estate loans have hindered SNS’s efforts to repay a government bailout received during the 2008 financial crisis and may prevent a successful outcome to its talks with private investors as the parties struggle to assess their scale of the shortfalls, according to the company statement. The real-estate unit, bought from ABN Amro in 2006, may be spun off.

SNS spokesman Roland Kroes declined to comment.

While authorities have no power to write down debt under current legislation, according to Adamson, they are able to intervene by selling or transferring assets, deposits and other liabilities out of a failing entity.

“Bondholders could be affected indirectly by a sale or transfer of liabilities that leaves them in an entity in which repayment is less probable,” he said. The distressed level of the junior bonds “is not surprising given the likely need for external support and for a group restructuring that could have negative implications for bondholders.”

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