Italy's Third-Biggest Bank Is Running Out of Timeby , , and
New CEO Morelli criss-crosses globe to pitch crucial offering
Rescue plan unfolding as Italians prepare for reform vote
The end game may have finally arrived for Banca Monte dei Paschi di Siena SpA.
For seven years, Italy’s third-biggest bank has repeatedly skidded to the edge of collapse, only to be bailed out by investors or the government. Now Chief Executive Officer Marco Morelli has until year-end to raise 5 billion euros ($5.3 billion) of capital -- seven times its current market value -- and offload almost 28 billion euros in soured loans to save the world’s oldest lender.
“Time is running out,” said Stefano Girola, who helps manage about 40 billion euros at Syz Asset Management in Lugano, Switzerland. “It’s like a huge puzzle, and one missing piece will doom the whole project."
As part of the plan, Monte Paschi is proposing a voluntary swap of 4.3 billion euros of subordinated bonds to reduce the amount of stock it would need to sell. The bank expects holders of junior bonds to swap about a quarter of the available notes for equity in the first stage of its rescue plan. It may also announce an offer for deeply subordinated securities known as Fresh bonds at 23.2 percent of face value, subject to review by authorities, the bank said on Wednesday.
The offer and the wider plan need to be approved by shareholders on Thursday in a meeting at the lender’s headquarters in the Tuscan city of Siena. Investors are so frustrated with Monte Paschi’s recurrent crises that there was concern ahead of the vote that the bank would not muster the quorum of 20 percent of its stockholders. Monte Paschi has reached that requirement to hold the vote, according to a person with knowledge of the process.
"Given the terms of the swap -- or rather the fact the the terms are not really known -- I would consider 1 billion of turnout a quite successful result," said Jacopo Ceccatelli, CEO of Marzotto SIM SpA, a Milan-based broker-dealer. “At this point it’s really difficult to say whether this would be sufficient to successfully go through with the capital increase."
Once past that hurdle, Morelli will face the bigger challenge: persuading new investors to commit money to an institution that’s seen its stock fall by 99 percent since 2009, recorded 15 billion euros in losses and been branded Europe’s shakiest major bank by regulators. He can’t count on the state to come to the rescue should he fail, because new European Union rules require bondholders and stockholders to absorb losses in the event of a bailout, an outcome that could cause a political firestorm.
An official at Monte Paschi declined to comment on the capital raising plans.
If the bank fails to right itself, the shock would be felt through the Italian financial system and possibly beyond. The euro zone’s third-biggest economy is straining under some 360 billion euros in soured loans, the equivalent of a fifth of gross domestic product. In July, even the U.S. Federal Reserve signaled concern about Italian banks’ declining share prices, shrinking margins and deteriorating loan books.
Overhanging Monte Paschi’s deal is the Dec. 4 referendum backed by Prime Minister Matteo Renzi to streamline the nation’s sclerotic government. Renzi’s pledge to step down if the vote fails -- as polls suggest it might -- has heightened the atmosphere of uncertainty.
“Investors are being asked to participate in this complex transaction even though the whole deal could come unglued if Renzi loses the referendum,” said Emanuele Vizzini, who manages 3.6 billion euros as chief investment officer at Investitori Sgr in Milan.
If that wasn’t enough, Morelli also faces competition from UniCredit SpA, which is considering its own equity offering. Barrington Pitt Miller, an analyst with Denver-based Janus Capital Management LLC, questioned why investors seeking exposure to Italian banks would opt for troubled Monte Paschi when UniCredit shares may be more attractive.
“The UniCredit investment doesn’t require you to believe in turnaround miracles,” Pitt Miller said.
Meanwhile, Monte Paschi is bleeding deposits and funding is “extremely vulnerable to market sentiment,” Fitch Ratings Ltd. said Tuesday. Customer deposits were 14 percent lower at the end of September than a year earlier, according to figures released by the bank.
The descent into crisis accelerated in July when stress tests by European regulators found Monte Paschi was the only lender out of 51 that would see its capital wiped out in a severe economic downturn. Fabrizio Viola, then the CEO, announced the bank would execute a 5 billion-euro equity offering and sell its bad debt.
In September, Monte Paschi abruptly announced that Viola was out, and Chairman Massimo Tononi soon departed as well. The board tapped Morelli, 54, a former chief financial officer at Monte Paschi who also served stints as head of the Italian operations at Bank of America Corp. and JPMorgan Chase & Co. In his turnaround plan, he pledged to return Monte Paschi to profitability, targeting net income of 1.1 billion euros in 2019.
On Oct. 25, the new CEO landed in London to begin making his pitch to investors. He scheduled so many meetings that he and his team, thwarted by London traffic, took the underground to get to appointments in Kensington, Mayfair’s hedge fund colony, and the financial district of Canary Wharf, said a person with knowledge of his travels who asked not to be identified.
Morelli confessed to money managers and analysts that when he was approached about taking the job, he was skeptical the bank could be saved, according to one attendee who spoke on condition of anonymity because the meeting was private. But he said his confidence was buoyed by the plan’s potential to bury the old Monte Paschi and create what he called the cleanest lender in Italy.
One day that week, more than 200 investors crowded into a ballroom at the Sofitel London St. James Hotel to hear him out, an attendee said. Morelli took the floor and described how the bank was planning to cut costs by shuttering 500 of its 1,900 branches and slashing 2,600 jobs. He also highlighted how the lender was going to sell off its bad debts, which comprise more than a third of its total loans, the most among Italy’s five biggest banks.
When he turned to the equity offering, tension mounted between the bank’s stockholders and bond investors. To build support for the recapitalization, the bank had proposed that bondholders swap their notes for equity. Stockholders said they were worried the credit investors would dump their shares as soon as the capitalization was completed. The fixed-income contingent countered that investors buying into the new offering would get a better price than them in the swap. Morelli dodged questions on the issue, said the attendee. Since then, the bank has said bondholders who swap will receive the same price as investors in the share sale.
Morelli also took his roadshow to New York and Boston. And he stopped in Doha, fanning speculation he was soliciting an “anchor investment” from the Qatar Investment Authority. The news drove Monte Paschi’s shares up 22 percent on Nov. 7, following a 20 percent decline the week before.
The stock has continued to see-saw as investors size up the details of the offering. Some investors are concerned that the bank’s price to tangible book value, when the capital raising is factored in, reaches a higher level than all of Italy’s largest banks save Intesa Sanpaolo SpA. Such a high valuation makes the recapitalization less attractive.
Next week, Morelli plans to hit the road again to meet with investors in the Persian Gulf region and the U.S., including those who’ve expressed an interest in the offering and are combing through the bank’s financials in its virtual data room. Closing the deal with those money managers is shaping up to be pivotal, and not just for the bank.
Monte Paschi has become a proxy for the Italian financial system, and in the eyes of foreign investors, perhaps its political system as well. The market must now confront the question of whether a bet on Monte Paschi is also a wager on whether Renzi, or any leader, can truly change the nation’s volatile political behavior.
"You can do a thousand roadshows, but at the end of the day, if the market doesn’t trust the system, you can’t do anything about it," says Alexander Plenk, the head of investment research at Bayerische Landesbank in Munich.