Hedge fund Caius says any UniCredit deal untenable until capital query resolved

(Reuters) - British hedge fund Caius Capital said on Monday it would be "untenable" for UniCredit SpA CRDI.MI to undertake any major transaction before issues Caius has raised regarding regulatory treatment of the bank's core capital are resolved.

The Financial Times reported on Sunday that UniCredit -- Italy's top bank by assets -- was exploring a merger with France's Societe Generale SA SOGN.PA.

Caius asked the European Banking Authority (EBA) in a May 3 letter seen by Reuters to investigate the regulatory treatment of a 2.98 billion euro ($3.49 billion) convertible bond issued by UniCredit in 2008.

It says the convertible was incorrectly classified as Common Equity Tier (CET) 1 -- the best-quality capital held by a bank and a key measure of its financial strength.

In a statement on Monday, Caius said: “It would be untenable for UniCredit to undertake any major transaction before the issues that we have raised regarding the eligibility of their ordinary shares as regulatory capital ... have been resolved.”

“If UniCredit was to merge with another bank, we believe that the issues we have identified would then most likely also apply to the ordinary shares of the combined group, making them ineligible as CET1,” the hedge fund added.

“We doubt that any government or the relevant regulators would tolerate the contamination of the regulatory capital of a systemic institution in such a way. However, we are confident that the regulatory authorities will address these issues in the near future, and in any case before such a transaction becomes a reality.”

UniCredit declined to comment on Caius’ statement on Monday.

A source familiar with the hedge fund’s thinking told Reuters last month that reclassification would reduce UniCredit’s CET 1 ratio by about 50 basis points and that Caius wanted UniCredit to convert the securities into shares.

UniCredit said at that time that the regulatory treatment of the convertible securities had been fully disclosed to the market and confirmed and reviewed by regulators. The EBA confirmed in May that it had received the letter from Caius and said it would respond in due course.

($1 = 0.8550 euros)

Reporting by Shalini Nagarajan in Bengaluru; Editing by Catherine Evans