Monte Paschi Presses With Capital Plan as Rescue Clock Ticks

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA is making a last-ditch effort to raise funds as the prospect of a state rescue looms.

After regulators rebuffed its request for an extension, the world’s oldest bank said it will press ahead with a plan to raise 5 billion euros ($5.3 billion) from investors in the next 19 days. As the odds of attracting fresh investment lengthened, the chance of a government bailout that will impose losses on bondholders grew.

“The recap of Banca MPS on the market remains extremely difficult to realize in the current context and in such short period of time,” Banca Akros analyst Luigi Tramontana wrote in a note to clients. “The alternative would be the nationalization of the bank and burden-sharing by hybrid and subordinated bondholders.”

Monte Paschi suffered a blow last week when Prime Minister Matteo Renzi quit after losing a national referendum on constitutional reforms. His resignation clouded Italy’s political outlook just as the troubled Italian bank was seeking to lure investors to its clean-up plan, prompting the lender to make the unsuccessful bid to the European Central Bank for a three-week extension, said people with knowledge of the matter.

Debt Swap

The bank now plans to give bondholders another chance to exchange its debt for equity, after initially persuading investors holding about 1 billion euros of bonds to convert. A stock sale would follow the debt swap, though banks haven’t yet committed to underwriting the transaction, Monte Paschi said. Should the share offering proceed, about 28 billion euros of bad loans would be removed from the bank’s balance sheet, bundled into securities and sold to investors.

Observers weren’t optimistic on the prospects for success. Manuela Meroni, an analyst at Banca IMI SpA, wrote Monday that a so-called precautionary capital increase with help from the state and burden-sharing by debt holders was the most likely outcome.

Monte Paschi shares closed 3.7 percent higher in Milan on Monday, after dropping 11 percent on Friday. The stock has fallen 83 percent this year, giving the company a market value of 593 million euros, less than an eighth of the amount it’s trying to raise from investors.

Monte Paschi is planning to ask retail investors to swap about 2 billion euros of subordinated bonds for equity, once it gets regulatory permission to eliminate some clauses that had discouraged savers from participating in the previous swap, people familiar with the deal said. The bank aims to complete the debt exchange over the coming week, and expects to raise an additional 1 billion euros, said the people, who asked not to be identified.

Qatar Question

Chief Executive Officer Marco Morelli, who took over in September, has traveled far and wide seeking investors willing to take a big bet on the company’s turnaround. An increased participation by bondholders would allow the bank to get a commitment for about 1 billion euros from Qatar’s sovereign wealth fund, while the banks advising the deal would place the remaining shares with investors in the market before Christmas, according to the people.

A representative for the Qatar Investment Authority wasn’t immediately available for comment.

While the bank kept seeking private investors, the Italian government was putting the finishing touches on plan B, which would impose losses on bondholders, a government official said Friday.

Another challenge for policy makers will be to prevent any fallout from spreading to other Italian or European lenders. Italy’s banks are burdened with about 360 billion euros in troubled loans. Five of the six worst-performing stocks this year on Italy’s benchmark FTSE MIB Index are banks, and, as in the case of Monte Paschi, many of the banks’ bondholders are households.

Monte Paschi is “seen as systemically relevant” and must be handled with “considerable caution,” ECB Governing Council member Ewald Nowotny told reporters in Vienna Monday.

--With assistance from Francesca Cinelli and Boris Groendahl To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net. To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Frank Connelly, Paul Armstrong