Italy Weighs Showing EU Three Separate Monte Paschi Exit Plans

(Bloomberg) -- Italy’s government may present the European Commission with three possible exit strategies for its majority stake in Banca Monte dei Paschi di Siena SpA as a year-end deadline for the plan approaches.

Prime Minister Giuseppe Conte’s second cabinet is likely to stick with his previous government’s plan to lay out three possible scenarios: a share sale, a direct disposal or a merger with another Italian lender, according to a person with knowledge of the matter. However, another person close to the discussions said the options may be narrowed to one before going to Brussels.

At stake is the approximately 5.4 billion euros ($5.9 billion) Italian taxpayers contributed to rescuing Monte Paschi as well as the Siena-based lender’s future as a viable private institution. Italian officials also have to assure that any exit plan doesn’t run afoul of European Union rules against state aid for troubled financial companies. Under the rules of the bank’s European Union-approved bailout, the state is required to provide an exit plan this year and dispose of its 68% holding in the rescued bank by 2021.

“I expect they will outline options that can allow Italy to buy time with Europe,” said Fabrizio Bernardi, an analyst at Fidentiis Equities. “With shares at a fraction of what the Italian Treasury paid and a bank still weighed down by higher-than-peer bad loans and legal risk, it’s hard to find a way out in three months.”

On Monday, the government confirmed press reports that it was considering merger options as a potential way out of its ownership, without giving further details. Representatives of the Treasury and Monte Paschi declined to comment.

Monte Paschi shares closed at 1.55 euros on Monday. That compares with the 6.49 euros the state paid when it pumped 3.85 billion euros into the bank in 2017. Italy also provided 1.5 billion euros to shield the bank’s junior bondholders, who’s debt was converted into equity.

Read More: Monte Paschi Turnaround Starts to Win Over Wary Bond Investors

Monte Paschi has significantly improved its balance sheet and lowered costs by cutting thousands of jobs and closing branches under Chief Executive Officer Marco Morelli’s turnaround plan. Bad loans accounted for 15% of the total as of June, down from a peak of more than 30%.

The government’s efforts to find investors would be bolstered by a bad-loan ratio of less than 10%, according to one of the people familiar with the matter. But to get there fast would require further disposals to distressed debt investors who demand deep discounts. The state-backed bad debt manager SGA may buy as much as 8 billion euros of the debt, according to Italian press reports. However, Italy would have to convince European authorities that any transaction was done at market prices to avoid violating rules against state aid.

Italian banks have had to accept as low as 12% of the face value for some of the bad loan. Although it’s currently profitable, Monte Paschi has limited capacity to handle losses from a deeply discounted debt sale. First-half net income was less than 100 million euros.

Press reports have talked of Unione di Banche Italiane SpA and Banco BPM SpA as potential merger partners for Monte Paschi. No formal talks are taking place with any other bank and the government hasn’t yet hired an adviser to look at possible mergers, one of the people said.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net;Sonia Sirletti in Milan at ssirletti@bloomberg.net;Alessandro Speciale in Rome at aspeciale@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Dan Liefgreen

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