Dealtalk: Buyers seek debt guarantee for Spanish bank sale

MADRID Fri Nov 18, 2011 5:55am EST

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MADRID (Reuters) - The Bank of Spain is considering paying off billions of euros of debt owed by Caja de Ahorros del Mediterraneo (CAM) in an attempt to secure a sale of the failed Spanish savings bank.

The central bank took over the Alicante-based lender in July after CAM, battered by the collapse of the country's real estate boom, failed to find private investors. It injected a total of 5.8 billion euros ($7.8 billion) of state funds into the 135-year-old bank with a view to a sale.

Since then, the escalation of the euro zone sovereign debt crisis has put even more strain on Spanish banks' ability to find funding, raising concerns over their ability to meet debt obligations.

On Thursday, the focus of the debt crisis shifted back to Spain as the government was forced to pay the highest borrowing costs since 1997 at a sale of 10-year bonds.

The Bank of Spain is already considering offering would-be buyers of CAM the carrot of protection against its future losses for ten years through the government's bank restructuring fund, central bank sources have said.

Now potential purchasers are pushing the central bank to go further and guarantee a hefty amount of liquidity as well, sources close to the deal said.

The central bank is thinking seriously about the buyers' demands, one of the sources said.

"The Bank of Spain is prepared to meet the eventual buyer's funding needs to meet CAM's short and medium-term debt obligations," said a source with knowledge of the situation.

"The central bank does not want to be left holding this baby. This is not part of its policy or strategy," a Madrid-based investment banker said.

A source with access to CAM data at September 30 said its debt obligations until 2013 total about over 16 billion euros, including its borrowings from the European Central Bank.

The Bank of Spain declined to comment.

Spanish banks Santander (SAN.MC) and Caixabank (CABK.MC) are the frontrunners for CAM in a field that includes Britain's Barclays (BARC.L) and U.S. fund JC Flowers, sources say. Bids are due later this month.

"Liquidity is going to be the main sticking point with CAM because of its outstanding debt obligations, particularly as the acquiring bank will have its own obligations to meet," another source said.

Another possible solution could be for the government to guarantee the bank's debt issues as part of the broader system of state guarantees introduced in 2008 after the start of the financial crisis.

An economy ministry spokesman said on Thursday this program of guarantees ends on December 31 and any extension would have to be negotiated with the European Union.

"Some kind of disaster insurance for CAM from the central bank or from the FROB (bank restructuring) fund has to be provided as a carrot for the eventual buyer," the investment banker said.

Only a big bank would have the capacity to acquire CAM given its liquidity problems and the fact that 50 percent of its loans to property developers are soured.

"CAM's franchise has value and it has an important local client base. The eventual buyer will gain market share in deposits which is key for a bank like Barcelona-based Caixabank," an analyst at a leading Spanish bank who requested anonymity said.

Santander could use majority-owned commercial bank Banesto BTO.MC to acquire CAM, in a first step toward a longer-term goal of combining its domestic retail networks under the one roof, analysts say.

Santander and Caixabank both declined to comment.

Bidders must complete due diligence by November 21 before presenting binding offers by November 24 or 25. The FROB is expected to announce the auction winner within 10 days. ($1 = 0.739 Euros)

(Reporting By Jesus Aguado; Additional reporting and writing by Judy MacInnes; Editing by Erica Billingham)

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