Monte Paschi Bonds Fall to Eight-Month Low on State Aid Report

Junior bonds of Banca Monte dei Paschi di Siena SpA fell to an eight-month low after a media report said the troubled Italian bank may require state support.

Monte Paschi’s 379 million euros ($424 million) of 5.6 percent notes due in September 2020 fell 1.6 cents on the euro to 62.6 cents, the lowest since Jan. 21, according to data compiled by Bloomberg.

The worst-performing lender in euro-area stress tests this year may have to turn to the government as it struggles to raise 5 billion euros in capital, Reuters reported late Thursday, citing three unidentified euro-area officials with knowledge of the matter. That raises the prospect of bonds being converted into shares because European state-aid rules normally require junior creditors to share losses before public money can be injected. The government has ruled out any support, Italian daily MF reported Friday, without saying where it got the information.

The bonds are “very volatile because of the rumors,” said Edoardo Ugolini, a fund manager at Zest SA in Lugano, Switzerland, which owns some of the bank’s junior bonds. “A swap into equity is very hard for the bank to resist because raising capital on the stock exchange is so difficult.”

A spokesman for Italy’s third-largest bank declined to comment on the bonds or the report.

Monte Paschi’s shares and riskiest debt have plunged since the stress tests in July. The stock has declined 85 percent this year, paring its market value to 546 million euros.

The Siena-based bank replaced its chief executive officer last week and is seeking to sell off 27.7 billion euros of bad loans. It’s already considering converting about 5 billion euros of junior bonds into equity, probably on a voluntary basis, as it struggles to attract buyers for new shares, Bloomberg reported earlier this month.