Paschi Plans to Raise Up to $5.6 Billion and Sell Bad Loans

  • Underwriters’ agreement is conditional on sale of bad debts
  • Atlante to buy mezzanine tranche in bad loan securitization

Banca Monte dei Paschi di Siena SpA will tap investors for the third time in two years by selling up to 5 billion euros ($5.6 billion) of stock to replenish capital following the planned disposal of its entire bad-loan portfolio.

JPMorgan Chase & Co., Mediobanca SpA, Banco Santander SA, Bank of America Corp., Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and Goldman Sachs Group Inc. have signed a pre-underwriting agreement to arrange the share offering subject to the bad loan sale and positive feedback from potential buyers, Monte Paschi said in a statement Friday after markets closed. The bank plans to sell its 27.7 billion-euro bad-loan portfolio for 9.2 billion euros, or 33 percent of its gross value.

Monte Paschi’s plan follows a share selloff that wiped almost 75 percent off the bank’s market value this year as concerns mounted about its capital strength. While the Italian lender is seeking to raise funds through private means, the nation’s government had held talks with the European Commission to back the bank’s recapitalization with state funds.

A Treasury spokesman said by phone that the Italian government and the European Commission have worked together to identify a range of options that are compatible with current rules both on state aid in the financial sector. However, there is no need for such an intervention, he said.

The bank, bailed out twice since 2009, is weighed down by a pile of deteriorating loans after Italy’s longest recession since World War II left businesses and households struggling to repay debt. The plight of Italian banks prompted some of the world’s biggest money managers to argue taxpayer funding would be necessary to restore them to health, and avert a broader crisis in the industry.

Monte Paschi will dispose of its bad loan portfolio through a securitization. The senior notes, up to 6 billion euros, may be backed by a state guarantee and sold on the market. The mezzanine tranche will be taken on by Atlante, the fund the Italian government has orchestrated to help troubled lenders raise capital and offload bad loans, for about 1.6 billion euros, while the junior tranche will be assigned to the bank’s shareholders.

Monte Paschi said it aims to complete the capital increase and sale of bad loans by the end of the year.

Stress Tests

Europe’s largest lenders face a second round of stress tests that are due to be published at 9 p.m. in London on Friday. The health check will gauge their capacity to withstand economic contraction at home, shocks in major emerging markets and declines in property markets and commodities.

Monte Paschi is expected by analysts to show the weakest buffer and the bank’s capital is “at risk,” Il Sole 24 Ore has reported, citing preliminary indications of the stress tests.

By selling loans at a discount or writing off more bad debt, the bank’s capital will be further reduced, forcing the bank to raise fresh funds. Chief Executive Officer Fabrizio Viola, who took the top job in 2012, has struggled to restore the firm to profit after accounting irregularities and derivative bets by previous managers backfired.

Monte Paschi had received a last-minute alternative turnaround proposal from UBS Group AG and Corrado Passera, Italy’s former economic development minister, submitted Thursday. That plan was rejected, Radiocor reported.

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