Why Italian Stability Is in the Hands of One Bank’s Bondholders
Banca Monte dei Paschi di Siena’s debt-for-equity swap to be completed by Friday
Italian insurer Generali has gone in to bat for Banca Monte dei Paschi di Siena, but the troubled lender and the rest of the Italian banking sector face a tense wait-to-see if other bondholders will support its capital raising.
The insurer has pledged to swap the MPS junior debt it owns into new shares. That gives the bank a healthy €420 million ($445.5 million) step toward its unofficial target of getting €1 billion to €1.5 billion from this crucial first leg of a three-part recapitalization.
Most of Italy’s banking sector is praying that MPS succeeds in a week beset with political risk. The country is struggling to sort out Europe’s biggest bad-loan pile and if MPS fails to raise the €5 billion it needs, it may be impossible for others to complete their own repairs.
Several smaller banks need funds, whileUniCredit, Italy’s largest lender, wants to raise about €13 billion.
Generali owns such a large chunk of MPS bonds because it bought all of a private placement not long after the start of the global financial crisis. No other single investor can back the debt-for-equity swap to this degree and bankers don’t expect to get commitments from other institutional investors until Friday’s deadline, leaving the market on tenterhooks.
But one thing is clear, the deadline won’t be extended despite Sunday’s referendum on Italian constitutional reform, which is spooking markets because it could see the reformist Prime MinisterMatteo Renzi quit if he loses.
MPS must complete its capital raising by the end of the year. There is no way it could raise the full €5 billion it needs by selling new shares alone so getting a decent sum in the debt swap is critical. Over the weekend, the bank hopes to complete up to €2 billion from a handful of anchor investors, who commit to buying shares before a public sale.
It wants to complete these two steps by the time the referendum result is known so that it can launch the public sale as soon as possible. That will raise whatever else is needed and will set the price for all the new shares in the process.
The bank has warned bondholders that if it isn’t recapitalized by Dec. 31, it can’t rule out forced conversion for all junior bonds, about half of which are held by retail investors, at worse terms.
The lion’s share of the bonds are trading around 65% of face value now, but are worth 100% of face value in the swap. Credit analysts atBNP Paribas reckon these prices should encourage institutional investors to swap up to €1.5 billion of bonds.
Without a good swap result, the losses for MPS bondholders look likely to be more painful—and hurting retail investors could stoke a wider systemic crisis in Italy and the wider eurozone.
Investors think political risk is elevated now, but a failure of this MPS deal may make it much worse.