Italian bank launches €3bn share sale to plug capital shortfall

Italian bank Monte dei Paschi di Siena launched a €3 billion share sale yesterday, its second cash call in less than a year, to plug a capital shortfall exposed by last year's Europe-wide stress tests and repay state aid.

The Tuscan bank is raising more than its stock market value, which stood at €2.4 billion at the end of last week, by selling 2.56 billion new shares.

The highly dilutive offer, which follows a €5 billion capital increase last June, is fully underwritten by a group of investment banks that committed to buy any unsold shares.

Like last year’s sale, technical factors distorting the stock price make it difficult to gauge investors’ appetite for the issue. But moves by two of the bank’s core shareholders to trim their stakes signalled lukewarm support for the deal.

A filing by market watchdog Consob showed Brazil's BTG Pactual had slightly reduced its stake to 1.9 per cent from 2 per cent, while the bank's historic foundation shareholder cut its holding to 1.55 per cent, from 2.5 per cent, and will buy into the rights issue to keep that stake.

The offer is for 10 new shares at €1.17 per share for every existing share held. The rights to buy into the offer can be traded until June 8th and can be exercised until June 12th.

The terms of the offer imply a theoretical ex-rights price (Terp) for the shares of €1.92 a share based on the stock’s closing value on Friday, and a price for the separately traded rights of €7.50 for every 10 new shares.

Like in last year’s cash call, the shares failed to trade for almost the whole day yesterday since the spread between buying and selling orders was too big. At the closing auction a small number of shares traded to leave the closing price at €2.14, up 11.3 per cent from Friday’s adjusted reference price.

However the rights to buy into the issue, which also failed to trade but according to analysts are the true indicator of the market response to the share offer, closed at €6.14, an 18.4 per cent drop on the Terp valuation.

Capital increases usually trigger a fall in the price of shares. However, in the case of Monte dei Paschi the large dilution effect, with shareholders who do not buy into the rights issue seeing their stake diluted by 91 per cent, distorts trading in the stock.

That happens because derivatives contracts on Monte dei Paschi shares as of yesterday take into account the much bigger number of shares that will be available only at the end of the capital increase, creating an artificial shortage of shares, traders said.

"There are a few technical problems . . . the rights are falling, the shares are rising. It is really early to give an opinion," Monte dei Paschi chairman Alessandro Profumo told reporters.

In any case, the European Central Bank has already told Monte dei Paschi that the capital increase will not be enough to solve its problems – a mountain of bad loans, a weak capital base and earnings underperformance – recommending that the bank finds a buyer quickly. – (Reuters)