Monte Paschi Wins EU Backing on Revamp, Paving Way to Rescue

  • Italian bank set to win preliminary recapitalization in weeks
  • Bank must restructure in return for EU approval for aid

European Union and Italian officials agreed on a plan to restructure Banca Monte dei Paschi di Siena SpA, allowing Italy to inject capital to rescue the world’s oldest bank.

Competition Commissioner Margrethe Vestager and Italian Finance Minister Pier Carlo Padoan reached “an agreement in principle” on a deal that paves the way for a precautionary recapitalization of the lender, according to a statement on Thursday. The deal, following “intensive” talks between Italy, the EU and the ECB, still requires formal approval.

Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The European Central Bank said then it needed to secure 8.8 billion euros ($9.9 billion) to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

“This is a crucial agreement that marks a turning point for the bank granting its survival,” said Mario Russo, an analyst at North Square Blue Oak Ltd. “The decision to bring forward the deal may allow the bank to revamp and return to profit and it’s also a positive signal for the country’s banking sector.”

Precedent

The agreement sets a precedent in how governments can help struggling financial institutions without triggering bank resolution rules forged in the wake of the financial crisis. EU law stipulates that the need for “extraordinary public financial support” normally means a bank is failing and should be wound down. An exception is made for temporary state aid to address a capital shortfall identified in a stress test if a number of
conditions are met.

The bank “will undergo deep restructuring to ensure its viability, including by cleaning its balance sheet from non-performing loans,” Vestager said in the statement. “I hope this will enable MPS to focus on lending to the Italian businesses and support the Italian economy." The EU said it expects to complete the accord in coming weeks.

Before Monte Paschi can receive the rescue, the ECB must confirm that the bank is solvent and meets capital requirements and Italy must get confirmation from private investors that they will purchase the non-performing loans portfolio.

Monte Paschi is in discussions with funds including Credito Fondiario SpA and Fortress Investment Group LLC about investing in the riskiest tranches of the securitization, which is backed by loans with a face value of as much as 30 billion euros, people said last month. Atlante II, the private investment fund set up with the help of the state to invest in non-performing loans, is expected to buy the largest portion of the same tranches, they said.

An official for the Italian Treasury said it is very satisfied with the agreement. Monte Paschi representatives couldn’t immediately be reached for comment.

Final Plan

The EU will now work with Italy on details of Monte Paschi’s final restructuring plan. Italy will need to formally notify the EU of the plan, including commitments on the restructuring. The EU will then move to adopt final approval for the recapitalization.

Monte Paschi’s senior management will have their salary capped at 10 times the average salary of bank workers as part of measures “to substantially increase its efficiency."

While subordinated bondholders will have to contribute to the costs of the restructuring, Monte Paschi will compensate retail junior bondholders who weren’t properly informed of the risk they were taking on that bonds might be converted to equity, according to the statement. The bank will buy the converted equity from those investors and pay them in “more secure senior instruments."

1933 Intervention

The state intervention is the biggest one since Benito Mussolini seized banks in 1933 -- including Paschi -- as part of his wholesale nationalization of the private sector. It could be followed by help for lenders including Veneto Banca SpA and Banca Popolare di Vicenza as part of a 20 billion-euro government package to help ailing lenders approved earlier this year.

While authorities were able to find an agreement on Monte Paschi, the future of the Veneto banks is still uncertain. The 6.4 billion-euro precautionary recapitalization requested for the two small lenders were thrown into doubt last week after the commission rejected a request by the banks to reduce the 1 billion euros of private capital they’re required to raise, according to people with knowledge of the matter.

Monte Paschi, undermined by derivatives deals that backfired and souring loans, has received 4 billion euros in taxpayer-funded bailouts -- which it has repaid -- and 8 billion euros from investors since 2009. The lender must raise capital to help cover the expected losses from selling non-performing loans on its books. Monte Paschi lost 87 percent of its market value in 2016 before the shares were suspended on Dec. 23.

— With assistance by Alexander Weber

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