DealTalk: BNP, SocGen may baulk at close-crop asset

People walk in front of a branch of French BNP Paribas bank in Marseille, September 13, 2011.

LONDON (Reuters) - BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA) face an uphill challenge to shore up capital with asset sales as buyers will expect at least a 20 percent discount, sources familiar with the situation said.

With French banking stocks on a downward spiral over the summer, BNP said on Wednesday it planned to sell 70 billion euros ($100 billion) of assets to beef up capital and cut funding needs, three days after SocGen committed to measures freeing up 4 billion euros of capital by 2013.

Analysts estimate SocGen will have to sell around 40 billion euros in risk-weighted assets to meet its targets.

But to free up capital when a spate of similar assets are coming to the market might require such a compromise on price that the sought-for capital benefits evaporate.

BNP and SocGen will start selling dollar-denominated debt portfolios including mortgage-backed securities, project finance and shipping loans as these are easier to value than business units, the sources familiar with the situation said.

"Financial players will dominate any sale and will be those setting the price, so it's quite clear that SocGen and BNP will have to sell at a significant discount," one of the sources said.

BNP said its activities provided "plenty of options to free up capital without taking any haircut." These options would include, for instance, letting the loans expire and stop investing in this type of assets, the bank said.

Societe Generale declined to comment.

Blackstone (BX.N) recently secured a 30 percent discount for Royal Bank of Scotland's (RBS.L) 1.4 billion pound portfolio of toxic UK commercial property loans.

Other private-equity firms, U.S.-based institutional funds, hedge funds and vulture funds are likely to circle the French banks as soon as they reveal the details of assets put up for sale, the sources said.

One vulture fund manager said these players were eyeing discounts of between 30 and 45 percent, based on recent deals.

A few cash-rich banks in the United States, Canada, Asia, Russia and the Middle East may also look at specific assets in oil & gas project finance and shipping finance.

But many other banks are also seeking to offload these portfolios, the second source and the fund manager said.

"At 10 percent discount a deal is still beneficial (to BNP and SocGen), but if the haircut is above 20 percent, the equity write-off can be bigger than the release of capital, making the deal negative," said a second fund manager active in the shipping industry. According to him, no funds in his field would look at an anything below a 20 percent discount.

BNP and SocGen announced a lengthy timetable running until the end of 2013 to stress they won't rush into transactions on the cheap, but time isn't on their side. Banks that a year ago retained their distressed assets hoping for better days have recently sold at huge discounts as they realized things were only getting worse, said the vulture fund manager.

BNP and SocGen are also seeking to exit consumer credit in Europe, but luring buyers for these assets may prove challenging as these capital-intensive activities became significantly less profitable after the credit crunch, the sources familiar said.

SocGen is also considering offloading business units -- rather than loan portfolios -- in its Global Investment Management and Services (GIMS) division, with multi-asset brokerage arm Newedge the most likely candidate, the sources said.

SocGen's joint-venture partner in Newedge, Credit Agricole (CAGR.PA) has long wanted to exit, but the bank has so far met few buyers because consumer credit is seen as a "cash-trap" activity, the first and second sources said.

($1 = 0.722 Euros)

(Editing by Will Waterman and Jane Merriman)