Monte Paschi Halts Coupon Payments on 3 Subordinated Notes

Banca Monte dei Paschi di Siena SpA said it suspended interest payments on three hybrid notes after European authorities demanded bondholders contribute to the restructuring of the bailed out Italian lender.

The world’s oldest bank said in a statement that it won’t pay interest on about 481 million euros ($650 million) of outstanding hybrid notes issued through MPS Capital Trust II and Antonveneta Capital Trusts I and II. Under the terms of the undated notes, the Siena, Italy-based lender is allowed to suspend interest without defaulting and doesn’t have to make up the missed coupons when payments resume.

“In the new world we’re in, bondholders pick up the tab when they can be forced to,” said John Raymond, an analyst at CreditSights Inc. in London. “State aid rules impose losses where possible.”

European Union Competition Commissioner Joaquin Almunia told reporters on Sept. 7 the bank should receive final approval for its restructuring plan within two months. The lender, which received a 4.1 billion-euro bailout, submitted a revised plan that more than doubles the amount of new capital it intends to raise to 2.5 billion euros as it seeks to repay the aid.

Almunia recommended that “cash outflows from the beneficiary to hybrid capital holders and subordinated debt holders be prevented to the maximum extent possible,” in a letter sent to Italian Finance Minister Fabrizio Saccomanni dated July 16 and seen by Bloomberg News.

Pay Caps

He also called for executive pay caps and said he was concerned about the viability of the lender.

Monte Paschi’s 108 million euros of undated, non-cumulative trust preferred stock issued through Antonveneta Capital Trust II fell 5 cents on the euro to 41 cents, according to Bloomberg bond prices. That’s the lowest price since April 23, data compiled by Bloomberg show.

While the bank is halting payments on the bonds that make up its Tier 1 capital, the most-junior layer of debt capital instruments, it also has the equivalent of about 2.6 billion euros of more-senior Upper Tier 2 debt in three issues in euros and pounds.

While Monte Paschi is making payments on these notes, it isn’t clear that it will be able to go on doing so, said Raymond.

Payment ‘Baffles’

“Their continuing to pay these rather baffles me,” he said. “One would have thought they would defer payments and I’m not sure the price reflects that.”

The lender’s 591.5 million euros of 4.875 percent bonds due May 2016 were quoted at 92.9 cents on the euro, a loss of 0.23 cents today, according to Bloomberg prices. The yield on the notes was about 7.7 percent.

Investors may be betting the bank will buy back the debt “at or slightly below current trading levels,” according to Eva Olsson, an analyst at Mitsubishi UFJ Securities in London. Individual investors in Italy hold many of the bonds and have been an important source of funds for banks in recent years, she said.

The company’s plans may be given during a conference call to be held on Sept. 25, according to the note.

“Monte likely will have to raise capital next year and we view any capital raising exercise in the market as challenging,” Olsson wrote.

The cost of insuring against losses on Monte Paschi’s subordinated debt rose, with credit-default swaps covering 10 million euros of the bank’s junior bonds for five years costing 2.1 million euros in advance and 500,000 euros annually, according to data provider CMA. That signals a 49.5 percent probability of default within that time.

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

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