(Adds fresh FROB comments, share price fall)
By Sarah White
MADRID Feb 14 Spain's bank restructuring fund FROB denied a press report on Thursday that said it has already set a share price for swapping debt into shares in bailed-out lender Bankia, though acknowledged existing shareholders would be heavily diluted.
Formed from a merger of several provincial savings banks, Bankia was devastated like many of its Spanish peers by a property market collapse, and a government-enforced clean-up of real estate exposures left it short of capital last year.
Bankia's rescue led it to take 18 billion euros ($24 billion) of European aid, which is set to wipe out the investments of the thousands of small savers who bought shares when the bank listed in 2011 after an aggressive marketing campaign. The IPO was priced at 3.75 euros a share.
The complex recapitalisation of Bankia will see Bankia's parent group BFA, controlled by FROB, subscribe to 10.7 billion euros of bonds issued by Bankia, that will then be converted into shares.
Though investors were braced for losses Bankia's share price fell by over 22 percent after a trading suspension was lifted on Thursday morning following the media report, which claimed the price at which the new capital will be swapped for shares has been set at 0.01 euros per share.
They were down 14.5 percent at 0.40 euros at 1210 GMT.
The conversion price has not yet been fixed, FROB said, rejecting the report in Spanish newspaper Expansion.
But the FROB revealed in December that Bankia had negative equity - more debt than assets - of 4.2 billion euros in December, raising expectations then that the share price would be reset at a very low level during the recapitalisation.
Under a European Union plan to prop Spain's banking sector, hit by a real estate market crash five years ago, shareholders must also bear losses.
"The entity's negative valuation and its end-2012 projected results indicate that the price at which the FROB (will participate in Bankia) via BFA will entail a big reduction in the shares' nominal value in order to absorb losses," the FROB said in a statement on Thursday.
Bankia forecast it would make a 19 billion-euro loss for 2012. ($1=0.7442 euros) (Editing by Greg Mahlich)
Our top photos from the last 24 hours.