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Bank of Cyprus eyes €1bln recap

25 June, 2014

 * Board to discuss HSBC restructuring plan *

Bank of Cyprus may seek an injection of up to €1 bln in fresh capital to cover the €944 mln outflow in customer deposits during the first quarter and not to impede on the current plan to dispose of non-core assets and reduce its exposure to other risks.
The bank’s board will be discussing the best way to proceed with this capital increase at its board meeting on Thursday to review proposals by advisors HSBC, while any new funding will also help maintain a healthy capital adequacy ratio in time for the crucial stress tests of 128 Eurozone banks in October.
The bank issued an announcement on Tuesday saying that “among other issues, there will be a discussion about funding and capital options that could expedite the implementation of the Group’s Restructuring Plan and, in tandem, could further strengthen the Group.”
News reports have suggested that the bank may seek funding of about €600-850 mln euros, with some even suggesting closer to €1 bln, which would also alter the current shareholder structure and introduce new institutionals.
The bank was recapitalised last year to the tune of about €3.4 bln when it converted unsecured deposits of more than €100,000 to equity and created new shareholders from among mega-depositors, mostly from Russia, annihilating the old shareholders who now represent less than 1%.
A further dilution of the present shareholding, however, would not be to the liking of the present board, who, nonetheless have no other choice.
This follows statements by Finance Minister Haris Georgiades on Monday who urged commercial banks to follow the government’s lead with its successful €750 mln bond issue and turn to foreign investors to strengthen their capital base.
He said that the four Cypriots banks that will undergo stress tests – Bank of Cyprus, Hellenic Bank, Russian Commercial Bank and Co-operative Bank – “should seek to recapitalise even before the stress tests, now that foreign investors are confident in the prospects of our economy.”
Bank of Cyprus will appoint a handful of advisors who will manage the new capital injection, despite CEO John Hourican denying a month earlier that the bank was considering a listing on the London Stock Exchange, as reported by SkyNews.
Hedge Funds and managers interested to take part in the capital injection reportedly include Fairfax, Capital Research, Wilbur Ross, Fidelity, Mackenzie and Brookfield, who have been active in Greece with the recent capital injection at Eurobank and are keen to look at Cyprus.
Analysing the bank’s first quarter results, Exito Capital International said “despite reporting a positive result of €31 mln, we still found some concerns which makes us believe it is far too early to suggest that the biggest Cypriot bank has turned the corner for good or not.”
The Emergo Wealth and Exito Capital report said that “the ability of Bank of Cyprus to continue as a going concern is dependent on the successful implementation of the Group’s restructuring plan, the period over which the restrictive measures and capital controls are in place, the continuing reliance on and availability of the Central Bank liquidity facilities and the actual outcome of litigation and claims mainly relating to the bail-in of deposits and the absorption of losses by the holders of equity and debt instruments of the bank.”
Though there are signs that things are slowly stabilising at BOC and hence chances of survival have increased, “it is obvious that the bank is still in intensive care and on life support. Without the emergency funding from the ECB the bank would literally be illiquid with potentially severe consequences,” said Ben Rosenberger of Exito Capital.
“The outlook is challenging and linked to a lot of uncertainties. The recovery – if successful - will certainly take several years.”