* Generali, Zurich to invest 5 mln euros each
* Bad bank must raise 5 bln euros in private capital
* Barclays, Deutsche Bank, Axa have also signed up
By Sarah White and Jesús Aguado
MADRID, Feb 13 Insurers Generali and Zurich will invest in a Spanish bank set up by the government to manage toxic property assets, three sources familiar with the situation said.
They said the Italian and Swiss insurers would invest 5 million euros ($6.7 million) each in the "bad bank", which was set up as part of a 40 billion-euro European bailout of Spanish lenders that were laid low by a property crash five years ago.
It is only a fraction of the 5 billion euros in private capital the entity needs as it prepares to take on more property assets from the troubled lenders at the end of February - most of that has already been raised from healthier Spanish lenders such as Santander.
But Spain has been keen to attract foreign firms as shareholders, in part to lend credibility to the bad bank, known as Sareb.
Britain's Barclays, Germany's Deutsche Bank and French insurer Axa, which also have a big presence in Spain, invested in a first phase of capital raising at the end of last year.
Sareb did, however, rebuff interest from three international funds recently because they were asking for special terms.
Sareb is poised to launch a second round of capital raising, with four mid-sized Spanish banks preparing to transfer between 10 and 15 billion euros of soured real estate assets and loans to developers on their books.
The bad bank will have roughly 50 billion euros of assets once that second round is completed, one of the sources familiar with the situation said.
Sareb, Generali and Zurich declined to comment.
Sareb began late last year with about 3.8 billion euros in private capital and 37 billion euros of assets seized from four nationalised lenders, including Bankia, which took the bulk of the 40 billion euros of European aid.
BBVA STEERS CLEAR OF BAD BANK
Spain needs to keep private capital in Sareb at over 50 percent to reduce the burden on public finances. Investments by shareholders are split between 25 percent of pure capital and 75 percent in subordinated debt.
Spanish utility Iberdrola is also set to invest 10 million euros in Sareb, another source familiar with the situation said. Iberdrola, which would be the first non-financial company to take part in the venture, declined to comment.
BBVA is the only Spanish bank that has so far refused to invest, generating intense speculation in Spain over its motivations, when other banks were seen to be participating mainly to help the country overcome its banking problems.
BBVA's Chairman Francisco Gonzalez has only said that the bank chose not to invest for "technical" reasons.
Sareb has already started selling assets, releasing 13,000 of properties on the market earlier this month. But many aspects of its structure, including servicing agreements for the assets, still need to be completely nailed down, and it is also in the process of revising its business plan.
($1 = 0.7427 euros) (Editing by Clare Kane and Tom Pfeiffer)