Paschi Is Said to Sound Out Investors for Senior Bad-Loan Notes

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA has started informal talks with Italian and international investors to sell some of the least risky notes packaged in Europe’s biggest bad-debt securitization, people with knowledge of the matter said.

Advisers led by Mediobanca SpA are sounding out potential buyers for a portion of the 2.9 billion euros ($3.4 billion) of senior notes, which are backed by an Italian state guarantee, said the people, who asked not to be identified because the deliberations are private. Banks’ treasuries, insurers, pension funds and investment firms specialized in asset-backed securities are being targeted, they said.

A formal sale process will start in the next few weeks after the state guarantee is received, the people said. The bank is considering selling about 800 million euros of notes initially, though that may change depending on investors’ feedback, one person said. A spokesman for Paschi declined to comment.

Chief Executive Officer Marco Morelli has worked for almost two years to arrange the 24.1-billion-euro securitization of non-performing loans, a transaction that aims to restore confidence to a bank that was rescued by the Italian state last year. The Siena-based bank recently applied for the guarantee for the senior portion, dubbed GACS, after getting an investment-grade rating, and expects to obtain it within five weeks.

As Italy tackles the mountain of soured debt burdening its financial system, banks are able to bundle their bad loans into securities for sale, while a state guarantee can make the least risky portions more appealing to investors. That framework was approved by the European Commission in 2016, and got a one-year renewal last year until Sept. 6. The Italian Treasury is seeking European regulatory approval for an additional six-month extension, a person with knowledge of the matter has said.

Monte Paschi, sunk by bad loans as well as losses on derivatives bets made by previous management, has shown progress toward a turnaround, relying on cost cuts and lower bad-debt provisions to swing to an unexpected profit in the first quarter. The CEO is seeking to restore the lender to long-term profitability by cutting jobs and branches and improving asset quality.

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