Greek banks will have to issue shares to meet more than half of a 9 percent capital adequacy requirement to be set as part of their recapitalization, sources said, in a move that could help them avoid nationalization.
The banks, whose capital base was almost wiped out by a combination of huge bond swap writedowns and rising loan impairments amid a deep five-year recession, will raise the rest through convertible bonds.
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Greece and its international lenders have earmarked money from the country's 130 billion euro ($168 billion) bailout to recapitalize viable banks. Shareholders must take up at least 10 percent of the new shares to be issued to keep the lenders privately run.
"Banks will have to issue common equity to meet a 6 percent Core Tier 1 capital ratio. The private sector will have to cover at least 10 percent of this for the bank recapitalization fund (HFSF) to have restricted voting rights on the shares," one of the sources told Reuters on Monday.
Athens is finalizing the terms of the recapitalization framework, and authorities have set up the Hellenic Financial Stability Fund (HFSF) as a capital backstop to facilitate the process.
The HFSF, funded from the country's EU/IMF bailout, has already injected 18 billion euros into the four biggest lenders as part of the recapitalization.
The fund expects to be allocated about 23 billion euros out of Greece's next 31.5 billion euro aid tranche which has yet to be disbursed as the government and international lenders have still to seal a crucial austerity package.
After a meeting between Finance Minister Yannis Stournaras and the top brass of the Greek bank association on Monday, the ministry said Greek banks would report already-delayed six-month results a month later at the end of November.
"We discussed the draft bill on recapitalization, it must be ready before the recapitalization money arrives," a banker who took part in the meeting but declined to be named told reporters.
He said banks would make use of a so-called deferred tax asset to help reduce their need for fresh capital, without going into details.
SHAREHOLDERS TO DIG IN POCKETS
Sources said that existing bank shareholders or new investors will have to pitch in to the recapitalization to avoid the government taking the banks over. If they come up with at least 10 percent of the new common equity to be issued, the HFSF will buy the rest and have restricted voting rights.
Should that fail, HFSF will end up with common shares with full voting rights, which would be tantamount to nationalization.
The remaining 3 percent of the required Core Tier 1 capital ratio can be addressed by issuing convertible bonds, such as so-called contingent convertible bonds (CoCos) that will be bought up by HFSF and count as regulatory capital.
"CoCos will mature in five years. After that they will be either paid back or convert into common equity. They will pay an annual 7 percent coupon, with a step-up feature of 0.5 percent, provided banks are profitable," one of the sources said.
If banks' Core Tier 1 ratio falls below a 5.125 percent threshold in the next 5 years, this would trigger the conversion of CoCos into common equity.
"If banks achieve a stronger-than-required capital adequacy, a Core Tier 1 ratio above 9 percent, and the central bank concurs, they will be able to repay the CoCos earlier," the sources said.
Under the plan, current shareholders or new investors participating in the forthcoming share offerings will be offered warrants as an incentive, enabling them to buy shares from HFSF at a later date.
"The warrants will be listed. The capacity to exercise them will not be continuous, they will be exercisable every six months," one of the sources said.
If private sector investors cover 10 percent of the share offering, they will be given warrants enabling them to buy back the remaining 90 percent of the common shares from the HFSF.
($1 = 0.7733 euros)
(Reporting by George Georgiopoulos; Editing by Helen Massy-Beresford and Hans-Juergen Peters)