UPDATE 3-Bankia junior debt loss seen below 50 pct - source

Fri Nov 16, 2012 2:27pm EST

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(Adds Bankia subordinated and hybrid debt position)
    By Carlos Ruano
    MADRID, Nov 16 (Reuters) - Bankia's holders of
junior and hybrid debt will likely take a loss of less than 50
percent as a condition of the Spanish state-rescued lender
receiving aid from Europe, a source involved in the negotiations
said.
    "Negotiations are still ongoing, but a threshold of under 50
percent is being negotiated," the source said on Friday
    Junior and hybrid debt holders will most likely have to swap
debt for shares rather than cash, the source said. 
    Bankia would not comment, nor would a spokesman for
competition policy at the European Commission.
    Many junior debt holders in Spain's state-rescued banks,
about to receive funds from a 100 billion euro ($127
billion)European credit line, are bank customers, making any
loss they have to accept as part of the bailout a hot political
issue.
    Thousands of Spaniards say they were conned by banks into
exchanging their savings for preference shares: high-risk
financial instruments seized on by lenders in the financial
crisis as a means of bringing in extra capital.
    Preference shares are a half-way house between a share and a
bond. They do not mature, are not protected by the state's
deposit guarantee fund and stop paying out a coupon if the
company falls into losses. 
    In the event of a bankruptcy, preference share holders are
at the back of the queue, behind bondholders. 
     
    State-owned banks are negotiating with the European Union
for capital as part of an international bailout, the terms of
which will include inflicting a loss on people who in many cases
handed over their life savings.
    The EU will rule on the banks' proposals on Nov. 28.
    Some 22.5 billion euros of preference shares were held by
bank customers in May 2011. That has dropped to 5.5 billion
euros since most listed banks swapped them for shares or bonds
to comply with a 2011 global regulation that preference shares
no longer count as bank capital.
    But state-rescued banks have not done any deals with their
customers. The stock market regulator says it is these customers
who account for almost all of the 5.5 billion euros in
preference shares estimated to remain in circulation. 
    Bankia has 3.1 billion euros in preference shares held by
retail investors, and just 0.1 billion euros held by
institutional investors. It has 1.9 billion euros in
subordinated debt held by retail investors and 1.3 billion euros
in subordinated debt held by institutional investors.
 ($1 = 0.7871 euro)

 (Additional reporting by Sonya Dowsett; Writing by Sonya
Dowsett; Editing by Dan Lalor and Steve Orlofsky)
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