Good marks for BBVA’s €3.5-billion swap

The financial City of Madrid expects BBVA to close the bank’s gap in core capital required by Basel III, after the group’s board approved this week an offer of mandatory convertible bonds in exchange for €3.475 billion in preferred shares.

Customers who hold the preferred shares distributed by BBVA in Spain will have the opportunity to exchange these at 100% of their nominal value for mandatory convertible bonds. The new bond, with an annual yield of 6.5%, will pay the coupon quarterly.

Ahorro Corporación Financiera (ACF) estimates that most of BBVA’s clients would be willing to accept the deal, as the buyback is for the whole nominal value and the coupon means a higher profit than the preferred shares’. Mirabaud advisers believe that

“investors improve the liquidity of their holdings.”

Were all preferred shares to be exchanged, the operation would generate sufficient core capital as to help to cover the €7.087-billion deficit that the European Banking Authority calculated in June in regards to BBVA’s balance sheet.

At Renta 4, experts calculate the operation will prop up BBVA’s core capital with €1.437bn. More optimistic, BS Análisis explains that

“the impact of this swap will cut down the deficit by 55pc,”

so the rest of the capital needs can easily be satisfied via retained earnings. On the other hand, analysts at ACF point out, too, that this re-capitalisation programme (in all cases, our emphasis)

reassures shareholders that there will be no cancellation of cash dividends. Market pressure may accelerate in the short term, though, because the conversion of the new convertible bonds involves a 618 million new share issuance, 12.6pc of all shares currently traded.”

Bankia Bolsa lowers this percentage at over 7pc, and notes BBVA’s capital tier 1 will exceed 10pc.

The mandatory conversion of the bonds will be carried out in two phases: 50% in June 2012 and the rest a year later. The bondholder has the option to convert in March 2012. BBVA also has the option to convert all or part of the bond in any of the dates of the coupon payment. The Spanish bank says that, after the swap,

customers will hold a liquid, straightforward and attractive investment […] After completing this operation BBVA’s capital adequacy will be stronger than that of many of its competitors.”

Basel III comes into force in January 2013. The preferred shares will gradually cease to be eligible as Tier 1 capital under Basel III rules.

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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