Banca Monte dei Paschi di Siena will step up efforts to win investors for an expanded debt-to-equity swap over the coming days, pressing ahead with a €5bn ($5.3-bn) capital increase as its options to avoid a state rescue dwindle.
The bank’s board agreed to stick with its original plan to complete the fundraising by the end of the year, Monte Paschi said in a statement on Sunday. A stock sale would follow the debt swap, though banks haven’t committed to underwriting the offer, it said. The European Central Bank on Friday decided against extending the deadline until January 20, according to people with knowledge of the matter.
Chief executive officer Marco Morelli is racing to find backers for the reorganisation that would clean up the bank’s balance sheet with the disposal of €28bn of soured loans. The lack of an extension from the ECB increases the possibility of state intervention in the event private investors balk.
“The recap of Banca MPS on the market remains extremely difficult to realize in the current context and in such short period of time,” Banca Akros analyst Luigi Tramontana wrote in a note to clients. “The alternative would be the nationalisation of the bank and burden sharing by hybrid and subordinated bondholders.”
Manuela Meroni, an analyst at Banca IMI, wrote yesterday that a so-called precautionary capital increase with the state and burden sharing by debt holders is the most likely scenario.
Monte Paschi climbed by as much as 10% in Milan trading and was up 7.3% at €20.93 as of 10:07am. The stock has fallen 82% this year, giving the company a market value of €605mn.
A change in government leadership just as Paschi was about to begin selling stock complicated the bank’s offering as investors were rattled by the uncertainty. Outgoing Foreign Minister Paolo Gentiloni was given a mandate to form a new government by Italy’s head of state on Sunday after Matteo Renzi quit following the prime minister’s defeat in a national referendum.
Monte Paschi is planning to ask retail investors to swap about €2bn of subordinated bonds for equity, once it gets regulatory permission to eliminate some clauses that had discouraged savers from participating a previous swap offer, people familiar with the offer said. The bank aims to complete the debt swap over the coming week, said the people, who asked not to be identified, adding that Monte Paschi expects to raise an additional €1bn.
An increased participation by bondholders would allow the bank to get a commitment for about €1bn from Qatar’s sovereign fund, while the banks advising the deal would sell remaining shares through a placing in the market before Christmas, according to the people.
A representative for the Qatar Investment Authority was not immediately available for comment. The Italian government is close to finalising a plan that would impose losses on bondholders, a government official said Friday. A state rescue may not take the form of a full-fledged bail-in that would hurt the bank’s many small-scale bondholders the most.
If a state rescue does become necessary, the government is considering a mandatory conversion of institutional and retail subordinated bonds into equity at a price that would likely be lower than that offered in the voluntary conversion, before it would buy shares to plug the remaining part, one person said.
The challenge for regulators and policy makers will be containing any potential fallout so that the fate of Italy’s third-largest bank doesn’t dent confidence in other Italian and European lenders. Italy’s banks are burdened with about €360bn in troubled loans. Five of the six worst- performing stocks this year on Italy’s benchmark FTSE MIB Index are banks. Many of the banks’ bondholders are households.