July 24, 2015 / 2:09 PM / 4 years ago

Greek bank boldholders fear Portuguese-style "bad bank" split

* NBG investors eager to find private solution for recap

* Worry that Portugal’s BES may be template

* Suggest debt-equity swap like UK’s Co-op Bank

By John Geddie

LONDON, July 24 (Reuters) - National Bank of Greece bondholders are nervous that they will suffer heavy losses if authorities decide to siphon off all of the bank’s healthy assets leaving a “bad bank” to deal with their claims, a source close to a creditor group said.

A group of senior bondholders in NBG sent a letter to European institutions last week saying they were concerned about measures that may be taken to revitalise the Greek banking sector after months of economic upheaval.

After drawn-out negotiations, Greece is close to clinching a third bailout deal but has kept in place the capital controls it used to prevent a bank run last month.

The investors, who hold a significant portion of a 750 million euro NBG senior bond issued last year, are worried the bank may be split into a good bank and a bad bank as was the case for Portugal’s Banco Espirito Santo last year.

Portugal separated out and pumped money into the healthy part of the bank creating a new entity “Novo Banco”, while remaining BES shareholders and subordinated bondholders were left with near worthless investments in the remaining bad bank.

NBG bondholders are concerned that such a split in Greece could require a level of recapitalisation that would also see senior bondholders left behind in the bad bank.

Under current Greek law, junior bondholders should contribute to a bail-in, while new legislation passed on Wednesday will also force senior bondholders to contribute from January 1 2016.

Recapitalisations of Greek banks may be needed before then, however, leaving the option of a bad bank solution on the table.

European Central Bank governing council member Christian Noyer said an initial injection of capital for Greek banks would be preferable before stress tests in the autumn.

In the letter sent last week, the creditor group said it was also eager to explore private sector solutions for any recapitalisation of NBG.

The source said that the rescue of Britain’s Co-operative Bank in 2012 could provide a template for a possible solution, where bondholders swapped their debt for new bonds and equity in the bank.

The Co-operative Bank ceded a 30 percent stake to bondholders including U.S. hedge funds Aurelius Capital and Silver Point Capital.

An official from NBG said the bank had not received any letter from creditors or bondholders expressing their willingness to participate in a possible recapitalisation.

“It’s too early, we have and they have to wait for the stress tests results,” he said.

Database eMAXX shows that Carmignac Gestion, Fidelity and BlackRock are among the biggest holders of NBG’s bond. (Additional reporting by Lefteris Papadimas in Athens; Editing by Alexander Smith and Alison Williams)

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