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CYPRUS: BOCY eyes €1 bln cap bids, US hedge funds in the running

28 July, 2014

The Bank of Cyprus board is discussing all options that will lead to a capital increase of 1 bln euros following Friday’s close of bids from institutional and other investors, bringing the island’s leading lender closer to passing the European stress tests in October with flying colours.


Reports suggest that US-based hedge funds are keen to grab more than half of the offered capital increase.
The capital increase should boost the bank’s Core Tier 1 liquidity level by four percentage points from 10.6% to 14.6%, with a lingering concern of rising levels of non-performing loans that cannot be services, restructured or recovered, due mainly to political pressure.
But the debate among board members has struggled to reach unanimity, especially as some of the new mega-shareholders, created after the Eurogroup imposed a “bail in” on their deposits in exchange for equity, will now see their stakes diluted further, while former shareholders prior to the crisis have seen their holdings blown into oblivion.
The board’s agenda is dominated by the capital increase, which could take hours, as have previous meetings, while a successful outcome will also determine the share price for the new capital increase and possibly a timeframe for the share’s return to the Cyprus Stock Exchange.
Local news sources suggested over the weekend that the biggest interest was demonstrated by foreign hedge funds, with the present shareholders expected to call an extraordinary general meeting in August to approve the most suitable bidder and the further restructuring of the shareholder registry.
One leading scenario suggests that existing shareholders will be able to apply for up to 20% in aggregate of the total number of shares offered to qualified investors in the first phase and at the same price as in phase 1, known as a “clawback”. The minimum purchase per investor in the clawback process will be €100,000 and all existing shareholders (whether or not qualified investors) will be eligible to participate.
News reports suggested that two US-based hedge funds have expressed an interest to subscribe to 54% of the capital increase and thus a majority control of the board, while another hedge fund has submitted a bid of 30 cents a share, that in itself would cover the entire new capital and again seek board control.
Previously, New York-based hedge fund Third Point and two other institutionals, online gaming company Wargaming.net and local Cooperative-owned investment house Demetra, had pumped about 100 mln euros to support Hellenic Bank and give it a cushion of liquidity, as it had not participated in the purchase of toxic Greek government bonds that had brought Bank of Cyprus to verge of collapse and shut down another bank, Laiki Popular.
Meanwhile, the government, acting through the Public Debt Management Office that has been handling the recent successful return to markets after a three year absence, decided in June to pay back some €950 mln owed to Bank of Cyprus after it was forced to absorb the now-defunct Laiki Popular Bank, itself the victim of crooked bosses and state incompetence. The amount matches the €944 mln in outflow in customer deposits during the first quarter, with Bank of Cyprus depositors still jittery over the future of their savings.
The refund is part of the €1.8 bln rescue package the government threw at Laiki Popular in 2012 and subsequently nationalised the island’s second biggest and oldest lender, a lifeline that came too late to close the black hole created by unsecured lending and excessive investments in toxic Greek government bonds.
When BOCY absorbed Laiki, it also undertook the burden of the €1.8 bln, as well as €9.5 bln in Emergency Liquidity Assistance that had accumulated there and which the Bank of Cyprus has been repaying in recent months.
Finally, the former BOCY shareholders, who initially saw their stakes diluted to below 0.5% of the current capital and will see their holdings shrink further with the new capital increase, are meeting later on Monday to decide on their next actions.
The group, headed by the Church of Cyprus, said that the resolution authority that decided to shut down Laiki did not consider the realised gains from the merger with BOCY and that assets, including the two banks’ operations in Greece, were not properly accounted for and distributed to stakeholders.