Italy races to secure privately-backed bailout of Monte Paschi

Italy was last night racing to secure a privately-backed bailout of Monte dei Paschi di Siena, the most exposed of Italy's troubled lenders, including a plan to raise €5 billion of further capital to avert nationalisation, according to bankers and European officials.

The desperate push to rescue Italy's oldest and third largest bank by assets, which has twice been bailed out by the state and raised €8 billion of capital in the past two years, comes ahead of European banking stress tests results on Friday, which lossmaking Monte Paschi is widely expected to fail.

Shares in Italian banks have halved this year on concerns about their huge exposure to non-performing loans (NPLs), low profitability and weak governance.

The IMF considers the woes of Italian banks, collectively holding €360 billion of problematic loans, to be among the leading potential risks to global growth.

People involved in the Monte Paschi talks say they are aiming for a private rescue of the bank to be announced before the stress test results are published after US markets close on Friday.

However they admit that the negotiations could go down to the wire or beyond the weekend. This raises the prospect of shares in Monte Paschi and other Italian banks coming under renewed pressure when markets reopen on Monday, which many fear could prove lethal.

Kill the share

“If there isn’t a plan then investors will read the [stress test] results and on Monday kill the share,” said a person familiar with the thinking of the government of Matteo Renzi, Italy’s prime minister, who has been seeking a solution.

Mr Renzi, whose political future is tied to a constitutional referendum in the autumn, is desperate to avoid any hit to retail investors and potential voters which would come if the private solution fails and there is a state rescue.

Any such rescue would be under EU rules, which would mean a so-called bail-in, where junior Monte Paschi bonds would be converted to shares and compensation given to retail investors.

Italian officials and senior bankers fears this would lead to a replay – on a larger scale – of the travails of Portugal’s Novo Banco, where the largest investors took the hit while retail bondholders were shielded, resulting in a collapse in investor sentiment and a capital flight.

The privately-backed plan, which is still under discussion and could change, would involve a multi-layered deal to rid Monte Paschi of €10billion of net non-performing loans and recapitalisation worth up to €5 billion, say people involved in the talks.

White knight

It follows failed attempts by Mr Renzi to find a “white knight” buyer for Monte Paschi, including Italy’s stronger capitalised banks, Intesa Sanpaolo and UBI Banca, say senior bankers. Instead, Intesa Sanpaolo and

UniCredit

have agreed to put a further €160 million into Atlante, a privately-backed fund, alongside pension funds and CDP, the state bank, to put a total of about €3 billion into Monte Paschi bad loans.

To clean up the lender at least €10 billion of its non-performing loans would be spun off into a special purpose vehicle. This would then be securitised, with shareholders taking the more risky junior tranche of debt and Atlante taking the mezzanine tranche.

The least risky senior tranche would be backed up to €7 billion of bridge loans from a pool of banks likely to include JPMorgan of the US and Mediobanca, the Italian investment bank.

Senior tranche

The longer term aim would be for the senior tranche to be guaranteed by a government-backed scheme, known by the acronym GACS.

To boost its capital Monte Paschi would launch a rights issue of up to €5 billion, its third in three years and worth more than five times its current market value. Analysts believe this would be a tough sell given the bank’s reputation for scorching investors capital. They also said the problems in Italian banking would not be solved by the rescue of Monte Paschi.

Carlo Tommaselli, an analyst at Credit Suisse, has argued that Italy’s banking sector needs €30 billion “to solve the NPL issue”. Of the €360 billion of loans which are unlikely to be repaid in full, €200 billion are loans to creditors already deemed insolvent. Of those €85 billionn are not already written down on banks’ books.

He added that “although the regulator does not currently allow a US-style Tarp solution, we believe state aid may be needed to address the NPL issue”. –

(c) 2016 The Financial Times Limited