UPDATE 2-Spain's Bankia boosts capital buffers ahead of stress tests

Mon May 12, 2014 7:27am EDT

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(Adds context, Spanish sovereign issue, banker and treasury quotes)

By Aimee Donnellan and Sarah White

LONDON, May 12 (IFR/Reuters) - Spain's bailed-out lender Bankia is poised to sell a euro-denominated Tier 2 bond, according to a lead manager, helping it strengthen its capital base ahead of European stress tests and marking another step in its turnaround.

The bank, which is about 61 percent owned by the state, is set to issue a 10 year bond, which cannot be redeemed for five years, the banker said.

"This deal is a new step in the bank's rehabilitation and follows a trend of European banks building up new capital buffers to meet CRD IV requirements," said Fernando Cuesta, treasurer at Bankia.

"Up until now, Bankia's capital structure was fully formed by equity, which is not the most efficient considering new CRD requirements, so this will enable the bank to improve its capital position."

Banks across Europe are building up their financial strength to prepare as much as possible for region-wide health checks due in the coming months, which could unveil capital needs.

Some of the top European banks, including Spain's Santander last week, have been making the most of good funding conditions to issue bonds that can count towards capital levels.

The cost of insuring subordinated debt has fallen to a four-year low, with the iTraxx Subordinated index at 113bp on Monday, according to Tradeweb, down from 530bp at the end of 2011.

For Bankia, the issue, likely to be tested in the market on Tuesday morning, marks another step in its rehabilitation. It returned to the public funding market with a bang in January of this year - ending a drought of nearly two years - with the sale of 1bn of five-year senior unsecured debt.

Its state rescue in 2012, after it was crippled by a real estate market crash, pushed Spain to request a European aid package for its weakest lenders.

Bankia needed 22.5 billion in total aid, but it has since returned to public funding markets and Spain's government has begun to sell down its stake.

"The market is in great shape and we've seen some reverse interest from investors that are looking for Bankia's subordinated debt," said a lead manager involved in the deal.

Bankia has hired Bank of America Merrill Lynch, Barclays, Credit Agricole CIB and Goldman Sachs, as well as its own investment banking unit, to sell the capital issue, which is expected to be rated B- by S&P and launched in the near future, subject to market conditions.

Bankia declined to comment.

Banks will be measured on their Core Tier 1 capital levels in the looming stress tests, but raising additional capital will also help them show regulators they are in a safe position.

Bankia's Core Tier 1 capital ratio stood at 10.91 percent at the end of March under stricter Basel III rules now in place - above minimal requirements. It was rescued with pure equity, and is now diversifying its capital base.

"This is the next logical step for Bankia as it works towards rebuilding its capital structure," said another lead manager.

The Spanish government, which has until 2017 to fully return Bankia to private hands, sold a 7.5 percent chunk of the lender through a market placement in February, turning a small profit.

It is widely expected to place more of its stake in the coming months if it can fetch a good price.

In 2012, Bankia made a loss of over 19 billion - the biggest in Spanish corporate history - but it has since returned to profit, after it was cleansed of its soured property assets.

The bank's senior bond that priced at mid-swaps plus 235bp back in January has tightened in by 75bp and is now bid at around mid-swaps plus 160bp, according to a syndicate banker.

CaixaBank priced the first Spanish Tier 2 since the financial crisis in late October of last year. Its 750m 10-year non-call five-year deal was priced at mid-swaps plus 395bp and is now quoted at mid-swaps plus 216bp, according to Tradeweb.

Falling bond yields are also encouraging governments to issue, with Spain poised to sell its first euro benchmark inflation-linked bond this week. ($1 = 0.7269 Euros) (Reporting by Aimee Donnellan and Sarah White; Additional reporting by Jesus Aguado in Madrid, editing by Alex Chambers and Philip Wright)

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