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Spain's bad bank to convert 1.43 bln euros of subordinated debt into equity

MADRID, May 26 (Reuters) - Spain’s “bad bank” said on Wednesday its shareholders had agreed to convert 1.43 billion euros ($1.75 billion) of subordinated debt into equity to bolster its books as sustained losses have eroded its capital base.

The institution, set up to take on bad loans from the financial crisis in 2012 and known by its Spanish acronym Sareb, has been struggling since its creation as a slump in real estate prices has depressed the value of loans and assets.

Following the transaction, Sareb’s equity - after deducting last year’s results - will amount to 587 million euros of capital, it said in a statement.

In 2020, Sareb booked a loss of 1.07 billion euros while revenues fell 38% in a year marked by a 10.8% economic contraction in Spain due to the COVID-19 pandemic.

When Sareb was created it took over more than 50 billion euros in real estate and other toxic assets from nine savings banks. In exchange, it issued debt underwritten by the state for the same amount.

After selling 15.9 billion of all debt issued, Sareb still holds 35 billion euros in senior debt, which the European authorities recently ordered Spain to count as public debt.

Spain’s state rescue fund FROB holds a 45.9% stake in Sareb, while the rest is owned mainly by banks, Santander being the largest private shareholder with a 22.2% stake.

As the pandemic is putting additional strain on Sareb, shareholders are working with the government to find a way to allow them exit Sareb’s capital structure, two sources familiar with the matter said.

Sareb declined to comment.

Banks have been setting aside provisions to limit any potential losses due to their exposure to Sareb.

On Wednesday, Sareb’s board also formally appointed Javier Garcia del Rio to succeed Jaime Echegoyen as its new chairman.

$1 = 0.8181 euros Reporting by Jesús Aguado. Editing by Andrei Khalip and Mark Potter

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