November 9, 2011 / 12:23 PM / in 7 years

UPDATE 3-Dexia sets 4.2 bln euro cap hike for muni loan unit

* Blames new losses on Greek bonds for capital hike

* To convert 2.5 billion euros of loans into capital

* To shift 1.7 bln from sale of Belgian retail bank to muni unit

* Shares down 11 percent

* Denizbank data rooms to open next week (Adds analyst comment, CEO call comments; updates stock price)

By Christian Plumb and Julien Ponthus

PARIS, Nov 9 (Reuters) - Bailed-out Franco-Belgian bank Dexia SA set out plans for a 4.2 billion-euro ($5.8 billion) capital injection into its municipal lender Credit Local, after the unit took a fresh 2.3 billion loss on Greek sovereign bonds.

The bank’s board said on Wednesday it approved a plan to convert 2.5 billion euros of loans into equity and also give the municipal unit 1.7 billion in cash raised via the sale of Dexia’s Belgian retail bank to the Belgian government.

Dexia Credit Local’s wellbeing is key to French President Nicolas Sarkozy’s desire to safeguard the financing of French municipalities, towns and regions, many of which rely on the troubled bank for loans.

Dexia shares were down 11 percent at 38 cents at 1105 GMT, adding to a decline of some 72 percent in the past three months and pushing the stock to an all-time low.

Dexia — one of the biggest European victims of the euro zone crisis — was rescued by France, Belgium and Luxembourg a month ago. It was granted 90 billion euros ($124 billion) of state guarantees to cover its borrowing and accepted that Belgium would take over its Belgian operations for 4 billion euros.

The bank, which said third-quarter losses totalled 6.3 billion euros, is trying to sell off units, including fast-growing Turkish operation DenizBank to offset its massive losses on sovereign bonds and toxic assets.

“Basically their net asset value is zero,” said one London-based analyst. “It all depends on what price they will sell Denizbank, of course. That will help them.”

Based on today’s stock price, Dexia has a market cap of about 700 million euros.

“Data rooms” allowing potential Denizbank buyers to look over the lender’s operations and books are due to open next week, Dexia Chief Executive Pierre Mariani said on a conference call with journalists.

He said that the bank hoped to wrap up the various asset sales it is contemplating - which also include a 50 percent stake in a custody joint-venture with Royal Bank of Canada and its asset management arm - by the end of March.

Dexia said the capital hike for Dexia Credit Local would take place through the conversion into equity of 2.5 billion euros of subordinated loans already made by Dexia to the unit.

Dexia is also allocating 1.7 billion euros to the capital hike from 4 billion in proceeds from the sale of its Dexia Bank Belgium unit to the Belgian government.

Dexia officials later said in a conference call that the capital hike was mostly needed to offset 2.3 billion euros in losses on Greek sovereign bonds.

Dexia said the recapitalisation was also needed for Dexia Credit Local to comply with French regulatory requirements on its minimum capital level.

As part of the Dexia rescue, the second in three years, Belgium, France and Luxembourg agreed to guarantee the bond funding raised by the bank’s French division for the next 10 years.

The capital increase for Dexia Credit Local, whose bond issuance unit is being taken over by French state banks Banque Postale and Caisse des Depots et Consignations, was one of a series of disclosures made in Dexia’s quarterly trading update.

The document said the nationalisation of Dexia Bank Belgium would translate into a 4.1 billion euro loss for the group, higher than the initial 3.8 billion Dexia reported at the time of the bailout.

It also said that over the first nine months of the year, it had total losses, including the sale of Dexia Bank Belgium, writedowns in Greek sovereign bonds and other accounting adjustments, of 10.5 billion euros. ($1 = 0.724 euro) (Additional reporting by Phil Blenkinsop; Editing by James Regan, David Holmes and Jane Merriman)

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