Caixa Geral Recapitalization Depends on Costly Junior Debt Sale

Caixa Geral de Depositos SA’s access to much-needed state funds hinges on its ability to sell the riskiest type of bank debt.

Portugal’s biggest lender must sell 500 million euros ($561 million) of additional Tier 1 bonds “simultaneously” to a capital injection as one of its commitments, according to a Finance Ministry spokeswoman. The state-owned lender has to sell another 500 million euros within 18 months of the recapitalization to meet European state-aid rules, she said.

Caixa may struggle to attract private funds for its bonds before a sale of Novo Banco SA, the “good bank” that emerged from the 2014 collapse of Banco Espirito Santo SA, investors said. Caixa, which lost about 200 million euros in the first half of 2016, may not recoup the support provided to Novo Banco and may be liable for losses following a sale, Moody’s said in a report last month.

“The sale of Novo Banco might not be resolved prior to the subordinated issue, which would make it harder to place the bonds,” said Nuno Pereira, a fund manager at BPI Asset Management in Lisbon, which owns junior Caixa notes and may invest in the new debt. “It is going to cost them.”

Caixa may have to pay about 10 percent in annual interest on the notes, Pereira said. Its sale of junior bonds would be the first by a Portuguese bank since Novo Banco imposed losses on 2 billion euros of senior bonds owned by international investors in December.

Caixa is required to sell notes with a “high degree of subordination” to meet European state-aid rules for a 5.2 billion-euro plan to bolster financial reserves. The European Commission this week approved the plan, which includes cost cuts and won’t be considered state aid.