Monte Paschi Rating Cut as Probe Digs Deeper Into Losses

Banca Monte dei Paschi di Siena SpA, the Italian lender facing a criminal probe into money-losing structured deals, had its credit rating cut by Standard & Poor’s on concern the investigation may lead to bigger losses.

The losses “may be higher than initially anticipated” and demonstrate “a risk of management weaknesses,” S&P said in a statement late yesterday. The Siena-based lender had its long-term grade cut to BB from BB+ and remains on watch negative, which means the company may be downgraded again. Shares fell as much as 2.9 percent in Milan trading today.

Monte Paschi said last month it may be forced to restate results after Bloomberg News reported that it used derivatives to obscure losses. Accounting irregularities led to the criminal investigation targeting previous management. The bank is seeking state help to bolster its balance sheet after failing to meet capital requirements set by the European Banking Authority.

The Italian lender is also selling assets and reducing risk and costs to restore liquidity. Chief Executive Officer Fabrizio Viola said Jan. 28 the board will complete the bank’s bailout request by early February and the Italian Treasury will conclude the transaction by the end of that month.

S&P said the likelihood that the Italian government will give financial support to Monte Paschi if needed is “moderately high” because the bank holds “high systemic importance” to the country’s banking sector, according to the statement.

Bonds Fall

Monte Paschi fell 1.8 percent to 24.22 cents as of 10:05 a.m., valuing the bank at 2.8 billion euros ($3.8 billion).

Monte Paschi’s 4.875 percent bonds due 2014 dropped 0.14 cents on the euro to 98.38 euro cents at 8:58 a.m. in London, the fifth straight day of declines, Bloomberg Bond Trader prices show. That’s pushed the yield up to 516 basis points more than the benchmark midswap rate, the highest since the bonds were sold in September.

Moody’s Investors Service also placed Monte Paschi debt on review for a downgrade on Jan. 30 because of “considerable uncertainty” over the impact of the structured finance deals.

Documents revealed last month show that Monte Paschi’s former management used structured-finance deals to hide losses from previous operations. The bank has said it was investigating three transactions and will release a report on their financial impact.

Prosecutors in Siena are probing Monte Paschi’s past management for alleged market manipulation, false accounting, obstructing regulators and fraud related to structured-finance deals. Prosecutors in Rome have opened an investigation into market manipulation, news agency Ansa reported yesterday, without saying where it got the information.

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