What Italy’s Referendum Means for Monte Paschi: QuickTake Q&A

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Italy's Post-Referendum Political, Banking Risks

Italian voters’ rejection of constitutional reforms on Sunday couldn’t come at a trickier time for Banca Monte dei Paschi di Siena SpA, the country’s third-largest bank. Designed to streamline legislative decision making, the referendum morphed into a confidence vote on Prime Minister Matteo Renzi, who said he will resign after exit polls showed the measure had suffered a heavy defeat. That threatens to set off political and market turmoil just as Monte Paschi seeks 5 billion euros ($5.3 billion) in capital from investors.

1. Why does Monte Paschi need money?

The lender, deemed Europe’s weakest major bank in stress tests in July, was told by the European Central Bank to clean-up its balance sheet. The ECB requested the bank raise the funds needed to cover losses from a planned disposal of almost 28 billion euros of bad loans by the end of this year. Undermined by derivatives deals that hid losses, Monte Paschi has received 4 billion euros in taxpayer-funded bailouts and 8 billion euros from investors since 2009. Now it’s back again after more than a third of its loan book soured.

2. How might the referendum affect Monte Paschi’s plans?

It depends on how much uncertainty the vote unleashes. Investors might have already priced in a narrow “No” vote, and they may bet that a caretaker government can continue Renzi’s reforms, such as streamlining Italy’s clunky bankruptcy process. In contrast, a “yes” vote was expected to avert political upheaval, potentially boosting demand from investors for banking shares, including Monte Paschi.

3. How is the capital raising going so far?

The complex plan has three interlocking pieces: a debt-for-equity swap, a stock offering and the disposal of a pile of soured loans. The debt swap started last Monday and ran through Friday, with Monte Paschi asking bondholders to exchange 4.3 billion euros of subordinated bonds for equity. Bondholders agreed to convert almost a quarter of the debt offered in the swap, according to preliminary results released Friday by the Siena-based bank.

4. What comes next?

If banks managing the offering deem there’s enough demand, the stock sale could begin in the coming week. The amount to be raised will depend on the outcome of the debt swap, and, critically, how much Monte Paschi lined up ahead of time from so-called anchor investors. Chief Executive Officer Marco Morelli has traveled far and wide seeking investors willing to take a bet on the company’s turnaround. He visited Doha, fanning speculation he was soliciting an investment from the Qatar Investment Authority.

5. What about the disposal of doubtful loans?

Once the share offering is underway, a 27.7 billion-euro portfolio of bad loans will be moved off Monte Paschi’s balance sheet to a separate entity to be bundled into securities and sold. The stock offering is linked with the sale of soured debt, meaning one can’t happen without the other.

6. What happens if the capital raising fails?

It’s possible the ECB will give the bank more time, kicking the problem into next year. Otherwise, Monte Paschi would likely need help from the state. A bailout could prove unpopular because of how much taxpayer money the bank has already received. Under new European rules, it would also probably require shareholders and bondholders -- including individuals and pensioners -- to take losses. Italian Finance Minister Pier Carlo Padoan held discussions with the European Commission on how the government can help the lender without breaking regulations on state aid, Corriere della Sera reported Friday. A Finance Ministry spokesman declined to comment on the report.

7. Could Monte Paschi’s woes affect other Italian banks?

Monte Paschi has become a proxy for a banking system so if the market doubts it can complete its share sale there could be a knock-on effect for other lenders such as Banca Carige SpA, a Genoa-based lender under pressure by the European Central Bank to strengthen its balance sheet. Italy’s biggest bank, UniCredit SpA is considering a share sale of its own sometime soon. The Milan-based bank will hold an investor day on Dec. 13.

The Reference Shelf

  • For more on the impact of the referendum on Italy’s banks.
  • In Bloomberg Gadfly, Chris Hughessays a surprise “yes” vote would be a boon for banks shares.
  • Here’s a Bloomberg QuickTake on Italy’s banking problem.
  • The International Monetary Fund in an August paper took a look at the challenges weighing on the profitability of Italian banks.

— With assistance by David Scheer

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