A customer uses an automated teller machine (ATM) outside a Caixa Geral de Depositos SA bank branch in Lisbon, Portugal, on Saturday, Jan. 11, 2014. Portugal's Secretary of State for Treasury Isabel Castelo Branco said she "estimates" it will be possible for the country to sell bonds through auctions before its bailout program ends in the middle of May. Photographer: Mario Proenca/Bloomberg
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Portugal’s largest bank could face difficulties in raising €1bn from private investors as part of a €5bn recapitalisation package agreed with the EU, institutional investors warned on Thursday.

State-owned Caixa Geral de Depósitos is scheduled to place €1bn in subordinated debt with institutions in a move towards cleaning up a banking sector beset by bad loans and problem assets.

But Portuguese lenders have faced difficulties in raising debt since December when the central bank imposed heavy losses on some senior bondholders in Novo Banco, the so-called good bank rescued from the collapse of Banco Espírito Santo.

One large institutional investor said there was “no way” CGD could raise €1bn from private investors because Portuguese banks have been effectively shut out of debt markets since the bond controversy at Novo Banco.

The plan agreed for CGD includes Lisbon injecting up to €2.7bn into the bank as a capital increase, converting €960m of contingent convertible bonds into equity, transferring €500m in government shares in a CGD subsidiary to the bank and raising €1bn in subordinated debt from private investors.

Addressing the capital shortfall at CGD, Portugal’s largest bank by assets and deposits, marks a step towards tackling similar problems at other Portuguese lenders in a sector burdened by bad debts totalling more than €30bn.

“This is an innovative deal in Europe,” Mário Centeno, finance minister, said on Wednesday night when the agreement was announced. “It is good news not only for CGD but for the whole Portuguese banking system.”

The initial agreement ends months of tough negotiations between Lisbon’s Socialist government and the EU over the future of CGD. The EU said the recapitalisation would not constitute state aid because it would be made “under market conditions” and would produce positive returns for the state.

Raising debt from private investors is an EU condition required, among other measures, to ensure that the recapitalisation package does not constitute state aid.

The plan, agreed in principle between Margrethe Vestager, EU competition commissioner, and Mr Centeno, includes cost cutting, risk reduction and other efficiency measures aimed at “restoring CGD to long-term health”.

The plan requires final approval by the EU’s College of Commissioners.

CGD posted a net loss of €205m for the first half of 2016 and the government has ordered an independent audit following allegations of past irregularities in granting loans.

Mr Centeno said the business plan to be put in place targeted an adequate return for the state, CGD’s single shareholder, “under conditions identical to those that would be accepted by a private investor”.

The credibility of the plan will be tested in the market when CGD seeks to raise €1bn in subordinated debt from private investors, possibly later this year.

Mr Centeno said this debt would have “a high degree of subordination”, stressing that there would be no potential for it to be converted into equity, thus ensuring that CGD remained 100 per cent state-owned.

Any possibility of private investors acquiring a stake in the bank would be strongly resisted by the leftwing parties on whose support in parliament the minority Socialist government depends for its survival.

Dealing with CGD’s capital needs, however, will still leave other banks with large capital shortfalls. Barclays recently estimated that Portuguese lenders, including CGD, could need up to €7.5bn to resolve a “systemic banking crisis”.

Millennium BCP, the next largest bank after CGD, has seen its share price drop more than 60 per cent this year. Bankers have also warned that the sector could face heavy losses from the planned sale of Novo Banco.

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