CORRECTED-UPDATE 2-Spain's Caixabank boosts capital with costly bond

Tue Nov 12, 2013 12:06pm EST

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(Corrects Basel III capital ratio, size of stake in Bank of East Asia, corrects Caixabank stake in Inbursa)

* Caixa raises 594 mln euros in Repsol exchangeable bond

* Offers rights to Repsol dividend to attract buyers-source

* Repsol shares fall sharply, Caixabank steady

By Jesús Aguado and Tracy Rucinski

MADRID, Nov 12 (Reuters) - Spain's Caixabank has raised 594 million euros ($796 million) from bonds that could be exchanged into part of its stake in Repsol, striking a costly deal to boost its capital position while keeping voting rights in the oil group.

As well as an annual coupon of 4.5 percent on the 3-year bonds, Spain's third-biggest bank is offering buyers the rights to Repsol's dividend, a source familiar with the matter told Reuters on Tuesday.

Repsol's dividend yield is currently 5 percent - giving investors a total return of about 9.5 percent, well above the rates at which other Spanish companies have been able to sell debt recently, although below Banco Popular's 11.5 percent coupon on a convertible bond last month.

The deal will free up capital for Caixabank and help it improve solvency ratios under stricter international Basel rules, ahead of a Europe-wide review of banks' assets next year, which is also pushing peers to shore up their finances.

It also gives the bank a hedge against swings in Repsol's share price and retains its voting rights in the oil firm, whose dividend gives it an important source of income and where it has had sometimes tense relations with management.

"Caixabank is keeping political and economic rights over this Repsol stake while granting bondholders the dividends," the source said.

Caixabank has a 12-percent stake in Repsol and this could fall by 2.5 percentage points if the bonds are converted into Repsol shares when they mature on Nov. 22, 2016. However, the bank has also retained the right to pay cash or a mixture of cash and Repsol shares.

Any exchanged bonds will be offered in a price range of 18.25 euros to 22.81 euros, compared with Repsol's closing share price of 18.93 euros on Monday. So if Repsol's shares are trading above the range, Caixabank can offer bondholders cash and make a profit, and if the shares are trading below it, the bank can sell the stake at a guaranteed price.

Repsol's shares fell 3.35 percent to 18.295 euros in afternoon trade as buyers of the bond shorted the stock in a hedge operation that was part of the structure of the debt. Caixabank shares were down 0.2 percent at 3.751 euros.

Citigroup and Morgan Stanley were bookrunners on the deal.

FRESH CAPITAL

The dividend rights form part of a clause in the bond prospectus, the details of which have not yet been made public, the source said. Caixabank declined to comment.

The bank will lose out on 32 million euros in annual Repsol dividends, according to Reuters estimates.

Dividends from equity investments have been an important source of income for Caixabank in recent years, especially when it faced steep writedowns on soured property investments which pushed some Spanish rivals to need a bail-out.

Caixabank, whose profits fell nearly 80 percent in 2012, saw revenues from its equity portfolio rise 23 percent to 809 million euros that year. Its other key Spanish investment is a 5.6 percent stake Telefonica, though the telecoms group scrapped dividends in 2012.

But holding such stakes - especially ones of over 10 percent in other financial institutions - will become more costly under Basel III capital rules which start to come in as of January.

Earlier this year Caixabank cut its stake in Mexican billionaire Carlos Slim's financial group Inbursa to 9.01 percent.

BBVA, Spain's second-biggest bank, made a similar disposal, shaving its holding in China's CITIC Bank Corp to 9.9 percent in a loss-making deal. That turned the spotlight on Caixabank's 16.5 percent stake in Hong Kong-based Bank of East Asia Ltd, which it so far insists it wants to keep.

Through the Repsol deal, Caixabank will not necessarily end up handing over 2.5 percent of Repsol. But under so-called 'fully-loaded' Basel III capital criteria - a measure closely watched by the market, which factors in changes that need to be made by 2019 - the bond structure will improve solvency ratios.

Caixabank had a fully-loaded Basel III capital ratio of 8.3 percent of risk weighted assets at the end of September.

It said the Repsol deal would add 37 basis points to that ratio, and it would end 2013 with a fully-loaded Basel III ratio of above 9 percent - in line with the levels projected by bigger rivals BBVA and Santander.

($1 = 0.7459 euros) (Additional reporting by Sarah White and Carlos Ruano; Editing by Fiona Ortiz and Mark Potter)

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