Posted by on December 18, 2016 3:09 pm
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Categories: bailout Banca Monte dei Paschi di Siena bank Business Creditors debt Debt restructuring Economy Fail Finance fixed German Chancellor’s council germany Institutional Investors Italian government italy money Monte Paschi non-performing loans Subprime mortgage crisis Subprime mortgage crisis solutions debate

In a last ditch attempt to avoid a state bailout, on Monday Italy’s Monte Paschi will begin a share sale process as it aims to complete a capital raise of €5 billion ($5.2 billion) before Christmas, Bloomberg reported overnight. The bank will canvass institutional investor interest through Thursday, while the offer for retail investors will end on Wednesday. As the lender didn’t provide terms of the offer, the price and total number of shares to be sold will be determined based on investor demand and on the outcome of the separate debt-to-equity swap which started last week.

The bank’s CEO Marco Morelli, who took over in September, is scrambling to find financial backers in his effort to clean up the bank’s balance sheet which continues to corrode under the weight of rising non-performing loans. A failure to recatpialize the bank would be a blow to Italy’s sputtering efforts to revive a banking industry that’s burdened with about €360 billion in troubled loans, dragging down the economy by limiting lending.

In the share sale, Bloomberg notes that 35% will be offered to individual investors and 65% to institutional investors, including potential anchor investors such as Qatar whose interest in a private bank bailout dwindled following the unexpected outcome of the Renzi constitutional referendum. As part of the rights offering, existing shareholders will be offered a chance to buy 30% of the offering reserved for retail investors before the sale is open to others.

The lender last week extended a debt-for-equity swap, one of the three main components of the bank’s capital-raising plan. The bank also plans a cash infusion from anchor investors and a share sale. Some more details:

The offer, involving the exchange of about 4.5 billion euros of Tier 1 and Tier 2 securities, is set to end at 2 p.m. on Wednesday. Monte Paschi, facing a Dec. 31 deadline to complete the fundraising, also will promote an exchange on 1 billion euros of hybrid securities issued in 2008 known as FRESH at 23.2 percent of face value, the lender said in a filing on its website.

In the previous swap offer, bondholders have already agreed to exchange about 1.02 billion euros for shares.

Should the share offering succeed and the recapitalization be completed, some €28 billion of bad loans would be securitized and sold to investors by the bank’s underwriters, removing them from Monte Paschi’s balance sheet. The capital being raised would be used to cover the bank for losses it would book in selling the troubled loans. If the sale fails, the conversions of debt-to-equity would be nullified.

Should the bank fail to raise the needed cash, and the private capital increase isn’t successful, the bank would have to seek aid from the Italian government. Under European banking rules, any losses must be imposed on bondholders if taxpayer money is used. The state is discussing a so-called precautionary recapitalization that would potentially limit bondholder losses.

Earlier today, Italy’s Il Sole 24 reported that Italy has prepared a plan to inject as much as €15 billion in state funds to sustain banks that could be approved this week, even if Monte Paschi succeeds in increasing its capital, in a further attempt to shore up confidence in Italy’s ailing banking sector.  The plan would help other troubled banks including Veneto Banca, Popolare di Vicenza and Carige.

Meanwhile, Germany once again voiced its reservations against a state bailout in a “worst case” scenario when Merkel aide Christoph Schmidt warned again against a taxpayer rescue of Monte Paschi.

“The restructuring of the bank should be achieved under the agreed rules, meaning the creditors must contribute to its rescue, not the taxpayers,” Schmidt, head of German Chancellor’s council of independent economic advisers, said in abstract of interview to be published Monday by Westdeutsche Allgemeine Zeitung.

Schmidt said that Italy’s effort to solve its banking crisis is key test for European banking union, and added that Italy must push for necessary reforms, warning that a lack of reforms in Italy could pose threat to euro area.

Which means that in the otherwise quiet pre=Christmas week, all eyes will be on Monte Paschi, and specifically the intentions of the alleged anchor investor, Qatar (and perhaps a handful of Chinese banks), to determine if Italy’s banking crisis is “fixed” if only for the near future, or if the new year is set to begin with another “risk flaring” episode out of the Italian banking sector as Monte Paschi’s bailout once again morphs into a political scandal and the biggest headache for Italy’s brand new government.

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