Photographer: Alessia Pierdomenico/Bloomberg

Monte Paschi Raises $1.1 Billion Through Debt-to-Equity Swap

  • Troubled lender’s preliminary result meets its forecast
  • Final tally of swap expected to be announced within days

Banca Monte dei Paschi di Siena SpA’s bondholders agreed to swap more than 1 billion euros ($1.1 billion) of subordinated notes for shares, making it easier for the bank to complete a vital 5 billion-euro capital increase by the end of the year.

QuickTake Zombie Banks

Bondholders agreed to convert almost a quarter of the 4.3 billion euros of debt offered subject to the swap, according to preliminary results released Friday by the Siena, Italy-based bank. The lender said last month that it expected investors to exchange 1.04 billion euros. Monte Paschi plans to release final results by Monday.

“It’s a good result for the first crucial step of the bank’s capital hike,” said Fabrizio Bernardi, an analyst at Fidentiis Equities. “To be successful, the bank must now show it has commitment from an anchor investor, in order to halve the amount of stock sale to the market."

The exchange is one of the three main interlocking pieces of the capital increase, which also would include a cash infusion from anchor investors and a share sale. The funds raised will be used to cover losses from the sale of soured loans, a move requested by the European Central Bank. Failure could force Monte Paschi into resolution, which could mean losses for shareholders and bondholders and reverberate across Europe.

Read more: Italian Banks Flirt With Disaster Again as Renzi Teeters

The bank is meeting with potential anchor investors, Chief Financial Officer Francesco Mele said on a Tuesday conference call, according to people with knowledge of the matter. Italian banks have been under pressure ahead of the Dec. 4 constitutional referendum because it may topple the government of Prime Minister Matteo Renzi.

"We do have an objective in rolling the dice. But it depends very much on this referendum,” said Edoardo Ugolini, a fund manager at Zest, which swapped just under 2 million euros of Tier 2 and Tier 1 securities. “If all these things happen, the bank will not be highly profitable but it will be clean."

The more Monte Paschi raises in the swap, the less it needs from selling new shares. Chief Executive Officer Marco Morelli has crisscrossed the globe seeking investors in the sale.

Possible Investors

Monte Paschi is set to meet with Qatar Investment Authority on Monday to discuss a preliminary investment agreement that’s been set out, Il Sole 24 Ore reported Sunday, citing sources. That may spur other investors such as George Soros’s Quantum Fund and Paulson & Co., the newspaper said.

Assicurazioni Generali SpA, Italy’s biggest insurer, converted about 420 million euros of subordinated debt, people familiar with matter have said. Monte Paschi offered 100 percent of face value for junior Tier 2 notes and 85 percent for subordinated Tier 1 notes.

"You can make money if you swap. If you don’t swap you risk being killed,” said Georg von Wyss, a partner at Braun Von Wyss & Muller, which swapped about 20 million euros of Tier 2 bonds. “If you bought the bonds at a discount, you get to swap at a par rate. And you get a clean bank at the end of it."

The lender, which had the lowest scores in stress tests of European banks in July, was told by the European Central Bank to complete the capital raising by the end of the year. Monte Paschi, bailed out twice, has burned through 8 billion euros of investors’ equity since 2014. The bank is burdened by bad debt and losses on soured derivatives bets under previous management.

Finance Minister Pier Carlo Padoan has held discussions with the European Commission on how the government can help Monte Paschi raise capital without breaking rules on state aid, Corriere della Sera reported Friday. Italy also asked the EU to authorize a nationalization of the bank should it become necessary, the newspaper said.

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