Monte Paschi CFO Said to Pile Pressure on Bondholders for Swap

  • Francesco Mele spoke on a call with investors on Tuesday
  • He said that any state aid would also include creditor losses

Banca Monte dei Paschi di Siena SpA Chief Financial Officer Francesco Mele told investors that even if the troubled Italian lender turns to the government for funds it would still force losses on bondholders, heaping pressure on creditors to accept a debt swap as part of turnaround plan, according to people with knowledge of the conversation.

State support would be one scenario if the bank fails to raise 5 billion euros ($5.3 billion) in capital privately, in part by swapping debt into equity, the people, who asked not to be identified because the discussion was confidential, cited Mele as saying in a call with investors on Tuesday. Mele didn’t indicate if the lender was working on a plan that included state aid and the people on the call said they interpreted his words as an attempt to cajole bondholders to accept the swap terms.

Italy’s third-largest bank is trying to persuade its creditors to swap 4.3 billion euros of subordinated notes for equity as part of a rescue plan, which also includes a stock offering and the disposal of a pile of soured loans. The lender has previously warned that it may be taken over by European regulators and restructured if investors refuse.

“It’s a stick to convince them that they won’t get better terms if this doesn’t go through,” according to Filippo Alloatti, a senior credit analyst at Hermes Investment Management in London, who said Hermes doesn’t hold Monte Paschi bonds. “It’s putting pressure on bondholders to accept the terms.”

An official for Monte Paschi declined to comment on the call.

The Italian Finance Ministry’s chief of staff also sought to persuade bondholders to swap their debt.

Conditions offered to Monte Paschi bondholders are “certainly much more attractive than those which would materialize if the capital plan is not executed,” Fabrizio Pagani told Bloomberg News on Tuesday. The conversion will contribute to the plan’s success, he added.

“We are confident that Monte dei Paschi will be successful in the cleanup of bad loans and in its capital increase,” Pagani said. “Investors are showing interest and the management is multiplying meetings with the financial community.”

The bank is still holding meetings with potential anchor investors for the capital increase, the CFO said on the call, according to the people. Monte Paschi executives are seeking to reach an agreement by the end of the week, but the lender may need more time with Italy holding a constitutional referendum on Dec. 4, he said, according to the people. Italian banks have been under pressure ahead of the vote because it may topple the government of Prime Minister Matteo Renzi.

A state injection would count as a “precautionary recapitalization” and require junior creditors to assume losses under European rules restricting publicly funded bailouts, Mele said on the call, according to the people. So-called precautionary aid allows for state assistance without a full application of the new rules designed to wind down a failing bank.

Plan B

“The execution risks of the deal remain high and are linked to the ability of the bank to find anchor investors,” according to Vincenzo Longo, a strategist for IG Markets Ltd. in Milan. “A precautionary recapitalization would be a better plan B compared with a bail-in because the damages for investors would be smaller.”

A July decision by a European Union court gives Italy some leeway to prop up frail lenders without imposing creditor losses, according to bank analysts including UniCredit SpA’s Natalie Tehrani Monfared and Philippe Bodereau, the global head of financial research at Pacific Investment Management Co.

The shares rose 3.5 percent on Wednesday at 11:48 a.m. in Milan, paring this year’s losses to 82 percent. Monte Paschi’s 369 million euros of notes due April 2020 -- which are included in the debt swap plan -- were little changed at about 62 cents on the euro on Wednesday, close to a ten-month low, according to data compiled by Bloomberg.

— With assistance by Lorenzo Totaro

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