Monte Paschi’s Junior Bonds Set to Be Paid Before Debt Swap Plan

  • 60 million pounds of subordinated notes mature on Friday
  • Lender said it’s considering voluntary debt-for-equity swap

Holders of Banca Monte dei Paschi di Siena SpA’s 60 million pounds ($78 million) of junior bonds due on Friday could be among the last to be paid in full as Italy’s weakest lender considers ways to reduce debt and raise capital.

Monte Paschi said on Monday that it’s studying a voluntary debt-for-equity swap and that its capital plan will be approved by the board on Oct. 24. The Siena-based lender may ask bondholders to convert as much as 90 percent of 5 billion euros of outstanding subordinated notes, people with knowledge of the discussions have said, though some creditors may not participate.

Unless the conversion offer is very attractive, “the condition will be better if we hold on,” said Richard Martinez, a fund manager at Sfp Asset Management in Geneva, who owns some of Monte Paschi’s longer-dated junior notes. “I prefer to own bonds rather than equity.”

Italy’s third-largest bank is struggling to raise sufficient funds privately and avoid wiping out thousands of customers who bought its bonds to support the lender during the financial crisis. Burdened by mounting bad loans and losses on derivatives bets gone wrong under previous management, the bank was forced to take state funds and tapped shareholders for fresh cash twice in two years.

Bonds Due

An official at Monte Paschi said that Friday’s bond will be paid on time. A separate official wasn’t immediately able to comment on the timing of a debt-for-equity swap or on details of the plan.

The conversion price may be below the face value of the bonds and above where they are currently trading, Italian newspaper Corriere della Sera reported Wednesday.

Monte Paschi’s 379 million euros ($423 million) of 5.6 percent notes due in September 2020 have fallen to about 67 cents on the euro from about 80 cents when the bank first announced plans for a 5 billion-euro rights issue at the end of July.

Monte Paschi’s 250 million euros of subordinated bonds maturing on Dec. 30 could escape losses if the swap doesn’t take place this year. Investors have little incentive to swap short-dated bonds for shares, said Francesco Castelli, a London-based money manager at Banor Capital, which oversees more than 4.5 billion euros.

“That’s the problem with voluntary exchanges,” he said. “The holders try to free ride out of the exchange.”