MADRID Bankia's (BKIA.MC) holders of junior and hybrid debt will likely take a loss of less than 50 percent as a condition of the Spanish state-rescued lender receiving aid from Europe, a source involved in the negotiations said.
"Negotiations are still ongoing, but a threshold of under 50 percent is being negotiated," the source said on Friday
Junior and hybrid debt holders will most likely have to swap debt for shares rather than cash, the source said.
Bankia would not comment, nor would a spokesman for competition policy at the European Commission.
Many junior debt holders in Spain's state-rescued banks, about to receive funds from a 100 billion euro ($127 billion)European credit line, are bank customers, making any loss they have to accept as part of the bailout a hot political issue.
Thousands of Spaniards say they were conned by banks into exchanging their savings for preference shares: high-risk financial instruments seized on by lenders in the financial crisis as a means of bringing in extra capital.
Preference shares are a half-way house between a share and a bond. They do not mature, are not protected by the state's deposit guarantee fund and stop paying out a coupon if the company falls into losses.
In the event of a bankruptcy, preference share holders are at the back of the queue, behind bondholders.
State-owned banks are negotiating with the European Union for capital as part of an international bailout, the terms of which will include inflicting a loss on people who in many cases handed over their life savings.
The EU will rule on the banks' proposals on November 28.
Some 22.5 billion euros of preference shares were held by bank customers in May 2011. That has dropped to 5.5 billion euros since most listed banks swapped them for shares or bonds to comply with a 2011 global regulation that preference shares no longer count as bank capital.
But state-rescued banks have not done any deals with their customers. The stock market regulator says it is these customers who account for almost all of the 5.5 billion euros in preference shares estimated to remain in circulation.
Bankia has 3.1 billion euros in preference shares held by retail investors, and just 0.1 billion euros held by institutional investors. It has 1.9 billion euros in subordinated debt held by retail investors and 1.3 billion euros in subordinated debt held by institutional investors.
($1 = 0.7871 euro)
(Additional reporting by Sonya Dowsett; Writing by Sonya Dowsett; Editing by Dan Lalor and Steve Orlofsky)