Bankia Shareholders Face Big Losses After Negative Valuation

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Shareholders in Spain's nationalized lender Bankia face high losses after the country's bank rescue fund disclosed on Wednesday the bank has a negative valuation of 4.2 billion euros, the last step before the injection of 18 billion euros ($24 billion) of European money into the bank.

Shares in Bankia fell 12.5 percent at the opening of the stock market on Thursday.

The state bank rescue fund, FROB, also disclosed in its statement that Bankia's parent group, BFA, was worth a negative 10.4 billion euros. The principles established in the law that shareholders are first in the queue to suffer losses will be preserved, the rescue fund said, but it did not specify how much their current shares would be diluted.

A source at the Bank of Spain said investors would lose most of their investment, or even all of it, although a final figure would not be known until

early next year. "It is too soon to say (how much shareholders will lose), but the dilutive effect will be strong, even very strong," the source said, speaking on condition of anonymity. The FROB also announced it would take over 99 percent of Banco de Valencia before it is sold to CaixaBank while shareholders in other nationalized lenders NCG Banco and Catalunya Banc will be wiped out.

Spain sought in June a 100-billion-euro credit line from the euro zone to recapitalize its banking sector after the burst of a decade-long property bubble in 2007 brought it low. Under a European Union plan to inject 37 billion euros into the four lenders, junior bondholders will also be forced to take a haircut on their investments.

Other conditions include cutting thousands of jobs and transferring toxic real estate assets into a so-called bad bank where they will be held until they can be sold off later. The cash injection into BFA-Bankia, due to take place before the end of the year, will be done through the transfer of 18 billion euros of paper issued by the European Stability Mechanism into the FROB, which will inject it into to BFA.

Bankia will then issue 10.7 billion euros of convertible bonds, or Cocos, which will be fully subscribed by BFA. A capital reduction will finally take place in early 2013 to adjust the economic value of the bank to its capital. The Cocos subscribed by BFA will then be transformed into ordinary shares, forcing the shareholders' losses.