Bankia Customers May Get Spanish Cash to Cover Bonds Losses

Spain is considering using public money to help Bankia group compensate private investors in about 5 billion euros ($6.7 billion) of bonds amid claims the notes were mis-sold, according to two people familiar with the matter.

The plan is one option Spain is assessing to help buyers of securities issued by the savings banks that now form part of nationalized Bankia, said the people, who asked not to be named because the talks are private. The International Monetary Fund, European Central Bank and European Union will discuss the proposal in Madrid next week, one of the people said.

The conditions of the European bailout for Spanish banks in July meant subordinated debt holders, including depositors who bought preferred shares sold as safe investments, lost almost half their money. Spain is creating an arbitration mechanism to decide on cases where bad practice in the selling of the notes can be shown, Economy Minister Luis de Guindos said Dec. 18.

“The government is trying to redress the harm done to thousands of families by the alleged mis-selling,” said Luis Arenzana, an investment adviser at Shelter Island Total Return Fund in Madrid.

Spain may have to stump up its own money to compensate junior note holders because the terms of the banking-industry bailout prevent it from using EU cash.

Debt Swap

Under the EU rescue, Bankia’s parent Banco Financiero y de Ahorros SA is swapping its junior debt for shares at valuations of 54 percent to 86 percent of face value, the lender said Nov. 28. If the shares rise, Spain will have to spend less to make good the private investors.

“One of the essential elements of the program is restructuring certain parts of the banking industry and also if necessary winding down of banks, mergers of banks and then subsequent recapitalization, which is being done in line with the memorandum,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels when asked about the Spanish plans.

Officials at Bankia, the Economy Ministry and Bank of Spain declined to comment.

Spain has already stepped in to prop up Bankia, advancing 4.5 billion euros to the lender in September before an 18 billion-euro capital injection backed by the EU.

Bankia was formed in 2010 from the merger of seven Spanish savings banks as part of government efforts to clean up real-estate losses. Bankia was nationalized in June 2012 and is the biggest recipient of aid from the country’s 100 billion-euro European bank bailout.

Institutional investors are “unlikely to take kindly to compensation” if they’re excluded from a deal, said Olly Burrows, a London-based credit analyst at Rabobank International.

“The Spanish government should be careful not to signal to the capital markets that some bondholders are more equal than others,” Burrows said.