* Plan similar to one being developed in Italy
* Candidates are mostly small, indebted companies
* KKR open to investing - sources
By Jesús Aguado and Sarah White
MADRID, June 11 Spain's banks are creating a form of "bad bank" to pool their stakes in struggling companies, bankers and financial advisers said, in a scheme aimed at reviving firms hit by the country's deep recession.
The new plan - which could be backed by private equity investors and echoes one being developed by Italy's Intesa Sanpaolo and UniCredit with U.S. investor KKR to pool some problematic loans - could get off the ground by this summer with a handful of small companies.
"There are different formulas being studied, like in Italy," said Fernando de la Mora, managing director at financial advisory firm Alvarez & Marsal, which is working on the Intesa and UniCredit deal.
"There are investment firms thinking of putting money in, to finance (companies') working capital needs," de la Mora told Reuters, in reference to the Spanish plan.
Spain's lenders, which are recovering from a property market slump that pushed some into state bail-outs, are still trying to find ways to cope with poor investments. Some have already transferred soured real estate assets to another government-backed "bad bank", known as Sareb.
The country left recession in the second half of 2013 and banks' bad loans as a percentage of total credit, at 13.4 percent in March, is starting to come off an all-time high reached at the start of this year.
But Spanish companies are still highly indebted, with a ratio of debt to earnings before interest, taxes, depreciation and amortisation (EBITDA), of 5.5 times - almost twice the European average, according to Alvarez & Marsal.
That poses a threat for banks as borrowers struggle with loan payments, while the government is keen to try and stop more firms going to the wall in a country where one in four of the workforce is already out of work.
Spain recently approved new rules to help ailing companies cut debt, and banking sources said in March that Santander , BBVA, Bankia, Caixabank and Sabadell were among lenders that had commissioned a study on a possible companies "bad bank" on the back of that reform.
The vehicle would most likely involve lenders swapping part of a borrowers' debt for equity, and then transferring that to an external vehicle, where it would be managed by a third party, though banks could also simply transfer debts.
The fund would group together loans or stakes related to the same companies. Once borrowers' prospects improve, they could be sold on, helping banks to recoup some money.
KKR, which recently opened an office in Spain and has lent to several companies seeking capital, could be interested in taking part in the Spanish plan in some form, two sources familiar with the matter said. KKR declined to comment.
Banks are usually reluctant to carry out debt-for-equity swaps, as managing companies can distract them from their core lending business.
"Santander does not have an industrial vocation, it's a temporary solution in that we will have to find, between all of us, a third party able to substitute (our) equity stakes," Remigio Iglesias, director general of the bank's asset recovery unit, said at an event in Madrid on Tuesday.
Equity stakes can also be costlier for banks than debt exposures, as they have to hold more capital against them. The Bank of Spain eased rules on the charges banks have to take on loans once they have been restructured, to try and balance out the hit.
The vehicle could launch with around three or four small companies, bankers said. Finding the right candidates might be one of the hardest tasks.
"There is resistance to come into (a vehicle like this) because it often means diluting owners' stakes," de la Mora at Alvarez & Marsal said. "They (companies) have to be persuaded that this will ensure their viability." (Editing by Mark Potter)