* Fund sets tough terms to backstop Pop Vicenza cash call
* Vicenza capital hike is key test for fund amid weak demand
* Atlante fund will buy unsold shares at 0.10 euros/share (Adds details, background)
MILAN, April 20 (Reuters) - Italy rushed to overcome last-minute hurdles to a plan to restore confidence in its banking industry on Wednesday, as a newly created bailout fund set tough conditions for the rescue of Banca Popolare di Vicenza.
In the first test for the Atlante fund, the centre-piece of a government-orchestrated scheme to avert a wider crisis in the euro zone’s fourth-largest bank sector, mid-tier lender Popolare di Vicenza is seeking to raise 1.76 billion euros ($2 billion).
Atlante was hastily set up last week by mostly private domestic financial institutions to bail out weaker Italian banks. It has so far had pledges for around 4 billion euros.
Popolare di Vicenza, Italy’s eighth largest lender, must raise the cash and list on the stock market to plug a capital shortfall revealed by the European Central Bank (ECB) and ward off the threat of being wound down, following big losses.
Atlante has committed to fully underwriting its capital increase, which has so far drawn poor investor demand and is expected by some analysts to end up with unsold shares totalling no less than 1 billion euros.
EXCEPTIONS TO RULES
Popolare di Vicenza said on Wednesday the fund would buy unsold shares at 0.10 euros each, at the bottom end of a 0.10-3 euros price range given by the bank for its initial public offer on Tuesday. At that price, a 1 billion euro investment would give the fund a stake in the bank of around 66 percent.
However, the bank said the fund would only step in if it did not have to launch a mandatory bid for the whole bank, which under Italian rules an investor must do if its stake in a company tops 25 percent.
A further condition of Atlante’s underwriting commitment, Popolare di Vicenza said, was that the bank had sufficient free float to list on the Milan bourse - a threshold normally set at a minimum of 25 percent of a company’s share capital.
Market watchdog Consob, which the bank expects to approve the prospectus for the IPO later on Wednesday, and the stock exchange can make exceptions to both rules if the deal is deemed to be a rescue.
But the conditions set by Atlante mean the cash call would need to attract at least 300 to 400 million euros from other investors so that the new fund does not end up with a stake of more than 75-80 percent and the market listing can go ahead.
“It’s not a huge amount, it should be doable”, said a source close to one of the banks involved in the share sale.
Popolare di Vicenza CEO Francesco Iorio told Il Sole 24 Ore newspaper on Wednesday the possibility that the bank’s free float may not reach 25 percent was “remote but we are taking it into consideration.”
The bank said on Tuesday the unusually wide price range for the share sale was due to the fact that the pre-marketing phase was too weak to be more precise.
In any case, the savings of thousands of its small shareholders are set to be wiped out as the price range values the stock at a fraction of what they paid.
Global coordinators for the share sale are UniCredit , Deutsche Bank, JP Morgan, Mediobanca and BNP Paribas. (Additional reporting by Andrea Mandala; Editing by Alexander Smith)
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