VIENNA Nov 2 Nationalised Austrian bank Hypo Alpe Adria is readying a roughly 1 billion euro state-backed hybrid bond combined with up to 500 million euros ($647 million) in fresh state capital to shore up its balance sheet, sources close to the situation said.
Austrian regulators have given Hypo until the end of this year to come up with 1.5 billion euros in extra capital as a buffer against recession and jittery markets, giving it a capital ratio of 12 percent of adjusted assets.
But its plans to improve its financial health by divesting units have bogged down in tough markets, posing problems on just how to raise the money. It also needs another 700 million worth of extra capital by the end of March 2013.
Plans under discussion with the government, the FMA markets watchdog and the Austrian central bank focus on issuing a state-guaranteed hybrid bond that would automatically convert into equity if need be, three sources close to the situation said.
The rest of the shortfall would have to come from another injection of state cash and whatever contribution the bank itself can make, the financial sources told Reuters on Friday.
Finance Minister Maria Fekter has said the 2012 budget earmarks 300 million euros in fresh aid to Hypo, but the sources said the cash part needed for the operation may surpass this.
That creates another headache for Fekter, who has seen aid to ailing banks eat into public finances and kept her from getting the state budget deficit below 3 percent of gross domestic product (GDP) in 2012.
A decision on how to proceed was due within two weeks, one of the sources said.
The trick will be in finding a structure for the bond that does not automatically add to Austrian state debt under the European Union's Maastricht criteria. Debt is projected to peak above 75 percent of GDP next year.
"The art will be constructing the bond in such a complex way that you can say on the one hand it counts as core capital and on the other it does not count as state debt," one source said.
Several European banks plan to sell debt that converts into equity when a bank's capital runs low, but regulators and investors have appeared cool.
Global regulators have said such contingent convertible bond instruments, dubbed "CoCos", would not count as core capital and failed to lay out clear standards for them, leaving it up to national regulators to determine how far banks could use them.
Austria had to take over Carinthia-based Hypo in 2009 to avoid a collapse that would have sent shockwaves through the region. The bank is now trying to shrink itself back to health and sell off units in Austria, Italy and southeastern Europe.
A Hypo spokesman declined to comment on the status of its recapitalisation plans, saying only: "Hypo will do its utmost to present the required capital buffer in a timely way that affects the budget and debt as little as possible."
The FMA and central bank declined comment. The finance ministry reiterated only that it was working on a solution that would protect taxpayers as much as possible.
($1 = 0.7730 euros) (Editing by David Cowell)