Monte Paschi Said Headed for Nationalization After Sale Failure

  • No anchor investor has expressed interest in buying stock
  • Government prepares 20 billion-euro package for lenders

Monte Paschi's Next Step May Be Nationalization

Banca Monte dei Paschi di Siena SpA will probably fail to lure sufficient demand for a 5 billion-euro ($5.2 billion) capital increase, leading to what would be the country’s biggest bank nationalization in decades, said people with knowledge of the matter.

The Italian cabinet may meet as early as Thursday evening to approve a bank decree that will include measures to cover any funds missing in Monte Paschi’s recapitalization, a senior official said, asking not to be identified before the decree is presented to cabinet.

No anchor investor has shown interest in the stock sale, the Siena-based company said in a statement late Wednesday. Two debt-for-equity swap offers will raise about 2 billion euros, with investors converting bonds for about 2.5 billion euros, the lender said. The interest is probably insufficient to pull the deal off, said the people, who asked not to be identified before a final assessment.

“Nationalization after five years of restructuring, two state bailouts and 8 billion euros of wasted private funds is at the very least a missed opportunity, if not an outright failure of both the private and public sector,” said Fabrizio Bernardi, an analyst at Fidentiis Equities.

Monte Paschi Chief Executive Officer Marco Morelli had crisscrossed the globe looking for investors to back the bank’s reorganization plan, which included a share sale, a debt-for-equity swap and the sale of 28 billion worth of soured loans. A nationalization of Monte Paschi, the biggest in Italy since the 1930s, could be followed by rescues for lenders including Veneto Banca and Banca Popolare di Vicenza as part of a 20 billion-euro government package.

The government would back lenders that fail to raise money privately, using a fund that would intervene if needed, and the banks will not be named specifically in the text of the decree, the official said. The European Commission has approved the plan, the official said, adding that shareholders will be hit, but the aim is to limit losses for stockholders and bondholders.

Record Risk

The lender’s subordinated bond risk is at a record amid concern the securities will share in the burden of a bailout. Monte Paschi’s 379 million euros of junior notes due in September 2020 fell 2 cents on the euro to an all-time low of 46 cents, according to data compiled by Bloomberg. Credit swaps insuring the bank’s junior bonds for five years imply a 70 percent chance of default, data compiled by CMA show.

State intervention and a hit to bondholders is the most likely scenario for Monte Paschi, which “could reduce the systemic risk for the sector,” Manuela Meroni, an analyst at Intesa Sanpaolo SpA, wrote in a note to clients Thursday.

Qatar’s sovereign-wealth fund, which had considered an investment, hasn’t committed to buying shares, people with knowledge of the matter have said. Other institutions that were considering buying shares have indicated that they would put funds in the troubled bank only if it’s able to raise 1 billion euros from cornerstone investors, according to the people.

Monte Paschi shares swung between gains and losses in Milan on Thursday, and were 3.2 percent lower at 2:20 p.m. local time. They plunged 12 percent on Wednesday. The shares have dropped 87 percent this year, trimming the bank’s value to 463 million euros.

The capital the bank is hoping to raise would be used to cover losses it would book in selling the bad debt. If the sale fails, the conversions of debt to equity would be nullified, as well as the terms of the bad debt disposal. If government funds are used in the bank’s recapitalization, bondholders will probably have to take losses under European burden-sharing rules. The cabinet is considering a so-called precautionary recapitalization that may reduce the potential losses.

“The recapitalization plan was too complex and unappealing, and the timing too short,” said Renaud Champion, head of credit strategies at La Française Investment Solutions.

Liquidity has been drying up, the bank said in a filing Wednesday. Commenting on risks under rules defined by the Bank of Italy, Paschi said it may run out of liquidity after four months, sooner than the 11 months forecast in last week’s filing.

The following is a summary of other Italian lenders facing pressure to shore up their finances and get rid of soured debt on their books.

* Banca Carige SpA: The European Central Bank instructed the Genoa-based lender to step up efforts to reduce sour debt on its balance sheet, giving it until Feb. 28 to present a more aggressive proposal. The existing plan calls for cutting the total to 19.9 percent by 2020 from 27.8 percent in 2015. The bank, which is struggling to restore investor confidence after revising its 2012 and first-half 2013 accounts, posted a loss in the third quarter on falling revenue and higher provisions for bad loans.

* Banca Popolare di Vicenza SpA/Veneto Banca SpA: The rescued Italian lenders in merger talks may need as much as 2.5 billion euros of fresh capital to fulfill requests from the ECB, people with knowledge of the matter have said. The ECB said the pair should reduce bad loans by as much as 4 billion euros, increase liquidity buffers and make additional provisions for ongoing litigation, the people said. Atlante, the state-orchestrated fund which took over the banks earlier this year, on Wednesday said it will invest 938 million euros in further stock sales by the banks.

* Four “Good Banks” : The four small domestic lenders rescued from collapse last year must be sold to comply with European regulators’ requests. Executives obtained an extension of June’s deadline as they struggle to reach a deal. Unione di Banche Italiane is in talks to buy three of the four regional banks. The Bank of Italy may seek additional contributions from lenders to bolster the country’s resolution fund if the sale doesn’t generate enough cash to repay creditors, people with knowledge of the matter have said.

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