ATHENS Greek bank shares fell sharply on Monday after Athens set the terms of a recapitalization plan for the battered sector, which entails new shares and convertible bonds to shore up its capital ratios but may hit current shareholders.
Greece and its international lenders have earmarked money from the country's 130 billion euro 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.
Failure to do so will mean nationalization.
Authorities have set up a bank support fund, the Hellenic Financial Stability Fund (HFSF), to recapitalize lenders whose capital base was nearly wiped out after huge losses from a sovereign debt swap and rising loan impairments.
The Greek banking index .FTATBNK lost 14.4 percent in what brokers said was a delayed reaction to the dilutive nature of the recapitalization scheme.
Even after Monday's drop, bank shares are still 45 percent higher than a June 11 low.
Under the plan, banks will issue new shares to meet at least a 6 percent Core Tier 1 capital adequacy ratio and contingent convertible bonds, called CoCos, to boost it up to 9 percent. CoCo issues may precede or follow the share offerings.
The CoCos will be bought up exclusively by the HFSF bank support fund. They will pay a 7 percent annual coupon and will have a half percentage point step-up feature, the plan said.
If the bonds are not bought back by banks after five years they will convert into common equity.
As set by the plan, the new share offerings will be priced at a 50 percent discount to the average price 50 days prior to the offering.
Analysts said, however, that banks would continue to face risks tied to what Prime Minister Antonis Samaras has described as Greece's "Great Depression".
"The proposed recapitalization of Greek banks appears to fall well short of a comprehensive, long-term solution," said Peter Doherty, partner at London-based bond fund manager Tideway Investment Partners.
"The improvements in capital ratios are welcome but do not come close to the levels required to manage through the serious economic challenges facing the country."
Greece's economy is expected to contract for a sixth straight year in 2013, with national output projected to shrink by 4.5 percent.
The continuing economic slump and a recently passed 13.5-billion-euro package of wage, pension cuts and tax hikes will weigh on households with unemployment already at 25 percent.
The HFSF fund, which will provide most of the new capital, buying most of the new shares and all of the convertible bonds banks will be issuing, will become their biggest shareholder.
The plan also calls for warrants to be given to investors who will participate in the share offerings as an incentive as long as the minimum take up of 10 percent is met. The warrants will entitle holders to buy back shares from the HFSF fund.
The fund has already injected 18.5 billion euros into the country's four biggest lenders and is awaiting Greece's next 31.5 billion euro bailout tranche to replenish its cash arsenal.
Reuters originally reported the basic terms of the recapitalization plan in October.
(Reporting by George Georgiopoulos; Additional Reporting by Chris Vellacott; Editing by Helen Massy-Beresford and Louise Heavens)