Bankia IPO Causes Shareholders $2 Billion Loss Post Bailout

Bankia SA (BKIA), the Spanish lender taken over by the government in a bailout this month, struggled to convince money managers to take part in its initial public offering less than a year ago. The bank instead relied on individuals, investors who are typically less equipped to analyze stock risks, to fill orders for the IPO in July. About 347,000 investors, most of them individuals like Josefa Rodriguez, an 86-year-old retired housewife from Madrid, bought Bankia’s shares. “My aunt is a lady with almost nil knowledge of financial products and this wasn’t an appropriate product for her,” said Marta Rodriguez, her niece, who spoke on her behalf in a phone interview as Josefa lives in a residential nursing home. “Staff at the bank was under a lot of pressure themselves to sell the shares.” After pricing at 3.75 euros a share in the IPO and gaining 4 percent in the first two weeks of trading, Bankia had dropped to 1.86 euros by yesterday’s close as concern grew that Spanish lenders would need more capital. Investors such as Rodriguez have since lost about $2 billion, or half of what they paid for Bankia shares in the IPO, deepening the cost of a sovereign debt crisis that’s pushed Spanish unemployment to an 18-year high. A spokesman for Bankia, who asked not to be identified in line with company policy, declined to comment. ‘Disastrous’ Decision Spain’s Association of Bank, Savings Bank and Insurance Users, known as Adicae, said today it would start a campaign to protect the interests of Bankia’s retail shareholders. The decision by then-chairman Rodrigo Rato to list Bankia was “disastrous,” the organization said in an e-mailed statement today, and had been made “without gauging or stating truthfully the financial risks of a company that just 10 months later has shown itself on the verge of bankruptcy.” “A deal like this undermines the credibility of the European banking sector and IPOs in general,” said Josef Schuster, founder of Ipox Schuster LLC, which invests in global IPOs. His European portfolio still holds about $20 million of the lender’s stock. The Bankia group, formed in 2010 from a merger of seven savings banks led by Caja Madrid, has the most exposure to Spanish real estate among the nation’s banks. The company turned to the stock market to raise capital last year after parking its worst real estate assets in the parent company. 10-Year Boom A 10-year property boom that came to an end with the onset of the global financial crisis left the nation’s banks with soaring bad loans and a need for capital. After encouraging banks to seek funds privately, Prime Minister Mariano Rajoy, who took over in December, said this month for the first time that Spain may use public money to save banks. In a fourth attempt to clean up the industry in less than three years, the government ordered banks last week to increase provisions on real estate loans that are still performing by about 30 billion euros. Bankia’s stock-market fundraising boosted the lender’s core capital ratio to about 9.6 percent, from 7.9 percent before the sale, according to the offer document. The Bank of Spain, the country’s central bank, had set a minimum target of 8 percent for publicly traded lenders. Dividends Promised To lure buyers, Bankia held out the promise of distributing about 50 percent of its net income as dividends. “The IPO was mainly a dividend play, so it appealed particularly to retail investors when interest rates elsewhere are so low,” said Ipox’s Schuster. “Bankia has a strong retail network and that’s basically how the deal got done. Now not only their shares get diluted, it’s also a question mark whether Bankia will be able to deliver future dividends.” Spain is taking over Bankia by converting its 4.5 billion euros of preferred shares in the group’s parent company into ordinary shares. Bankia group’s new management will have an initial deadline of May to present a restructuring plan, including additional state support, a person with knowledge of the plans said. To help find buyers for its stock outside its home market, Bankia had also hired the world’s top securities firms to be managers of the IPO. 15 Underwriters A total of 15 underwriters led by Bank of America Corp. (BAC) (BAC), Deutsche Bank AG (DBK), JPMorgan Chase & Co. (JPM) (JPM) and UBS AG (UBSN) earned a commission of about 1.2 percent on the 3.1 billion-euro IPO, or about 37 million euros, data compiled by Bloomberg show. While managers were taking orders for Bankia’s IPO, investor concern about Europe’s deepening debt crisis was already propelling Spanish bond yields to what was then a euro- era record. The lender had to reduce its IPO price by about 26 percent from its initial range in order to complete the sale.