UniCredit Shareholders Back $14 Billion Cash Call in Revamp Bid

  • Bank plans to use most of the cash to cover loan losses
  • Offer could lead to bigger stake for foreign investors

After Banca Monte dei Paschi di Siena SpA failed to raise funds on the market, attention now turns to a much bigger cash call by UniCredit SpA.

Italy’s largest bank won permission from investors Thursday for a 13 billion-euro ($14 billion) rights offer -- almost as much as its market value -- to carry out a turnaround plan under Chief Executive Officer Jean Pierre Mustier. Shareholders meeting in Rome also approved the conversion of every 10 shares into one new share after the stock dropped more than 45 percent last year.

It’s the latest test for Italy’s battered banks after Monte Paschi’s failure last month to raise 5 billion euros, followed by its government bailout, renewed doubts about their ability to deal with hundreds of billions of dollars in bad debt. Like its smaller rival, UniCredit intends to use most of the money -- 8.1 billion euros -- to absorb losses on loans that the bank is selling to investors at a discount. Unlike Monte Paschi, UniCredit is seeking the funding for a cleanup, not for its immediate survival.

“The plan has been well-devised,” Francesco Castelli, a London-based fund manager at Banor Capital Ltd., which oversees 6 billion euros, told Bloomberg Radio Thursday. He cited bonus restrictions, cost-cutting and risk reductions as reasons to support the strategy.

Mustier, a 55-year-old Frenchman who took over in July, said he has met with more than 200 investors in recent weeks and plans to start the offer before March 10. Many European and U.S. institutional investors have shown interest, he said in a interview Thursday in Italian newspaper La Stampa.

“UniCredit is finally addressing once and for all the legacy problem represented by the non-core credit portfolio,” Luigi Tramontana, an analyst at Banca Akros SpA, wrote in a Dec. 22 report. “The rights issue stands at the top of the expectations, given the stronger-than-expected effort to increase non-performing exposure coverage.”

Capital Buffers

One thing investors won’t find in Mustier’s plan is expectations for more revenue. With much of Europe still in low-growth mode, the bank sees revenue rising just 0.6 percent through 2019. Instead the CEO is counting on cost cuts to deliver 4.7 billion euros in net income in 2019, almost triple its earnings in 2015.

The bank plans to use some of 5 billion euros left over from its writedown on bad loans to finance the departure of thousands of employees through early retirement and voluntary redundancy plans. The rest will go to build up the capital defenses of a globally systemic lender.

UniCredit, which has significant operations in central and eastern Europe as well as in Italy, Germany and Austria, had the slimmest buffer among big banks in the region’s latest health tests. The bank may not be able to pay coupons on its contingent convertible bonds if the capital increase falls short, the lender said in a statement Thursday.

It’s not the first time UniCredit has tapped shareholders for a large amount. The bank raised 7.5 billion euros in 2012 at the behest of regulators. UniCredit has struggled to build capital since spending $60 billion on acquisitions over a decade. To plump up reserves, Mustier is selling assets including its Pioneer Investments fund management business and its Polish unit, Bank Pekao SA.

The bank has said it will book 12.2 billion euros in clean-up and restructuring charges next month, leading to its first quarterly loss since 2013. That year the bank posted a 15 billion-euro loss for the final three months, after setting aside provisions for bad loans and writing down goodwill from acquisitions.

Government Welcomes

UniCredit’s recapitalization is “one of the steps forward for Italy’s banking system,” Italy’s finance minister, Pier Carlo Padoan, told lawmakers in Rome Thursday.

The bank is trading at a discount -- about 0.4 times its tangible book value compared with 1.15 times for the 44-member STOXX 600 Banks Index. Factoring in the fresh capital, the measure rises to slightly above 0.5, still well below its main Italian peer Intesa Sanpaolo SpA, which is trading above 1.

“Despite the size, I think the shares will be all placed, given the bank’s cheap multiples and the positive outlook post-restructuring,” said Stefano Girola, who helps manage about 40 billion euros at Syz Asset Management in Lugano, Switzerland. Foreign institutional investors may replace some Italian organizations that don’t have the funding to subscribe.

Outside Interest

UniCredit’s main shareholders are already based abroad. The biggest is Capital Research & Management Co., a Los Angeles fund manager with a stake of about 6.7 percent. Aabar Investments PJSD, the Abu Dhabi-based sovereign fund was next with 5 percent, followed by BlackRock Inc., Dodge & Cox and Franklin Resources, according to Bloomberg data. Fondazione CariVerona and Fondazione CRT are the main Italian investors with 2.2 percent and 2.3 percent respectively.

Aabar Investments has had positive discussions with UniCredit managers but has not yet decided whether to participate in the bank’s capital increase, Alitalia SpA Chairman Luca Cordero di Montezemolo, who represents the fund on the bank’s board of directors, was cited by Italian news agency Ansa as telling reporters in Rome.

"UniCredit will get this rights offering done, but what is the prospect for success in turning around the company?” said David Hendler, founder of Viola Risk Advisors LLC, a credit analysis firm in Montebello, New York. “We believe it’s nil as the company really requires 40 billion euros to immunize it from adverse systemic risk.”

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