Paschi Said Within Weeks of Debt Swap Decision to Ease Stock Hit

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA is studying the size of a probable voluntary debt-for-equity offer to cut back a 5 billion-euro ($5.7 billion) stock sale envisaged in the bank’s current turnaround plan, according to people with knowledge of the discussions.

The troubled Italian lender may propose that bondholders have the option of converting as much as 90 percent of the 5 billion euros of outstanding subordinated notes, said the people, who asked not to be identified because the discussions are private. The Siena-based bank is reviewing whether to include 2 billion euros of subordinated securities sold to consumers, one of the people said, and a decision is due by the end of the month.

Monte Paschi’s financial advisers, JPMorgan Chase & Co. and Mediobanca SpA, are concerned that the inclusion of debt held by retail investors may lengthen the regulatory process. The restructuring is viewed as crucial to stabilize the bank and Italy’s financial system, the people said. Monte Paschi is considering offering a premium to the current market value of the securities to encourage investors to convert their bonds, they said.

The world’s oldest bank is weighing a debt swap just weeks after outlining a plan to bolster the balance sheet by relying solely on a stock sale amid concern investors may balk. It’s the third time in two years that the bank is selling stock, part of a restructuring that will see the company move 28 billion euros of bad loans off the lender’s books for securitization and sale. The July results of European stress tests for 51 banks showed Monte Paschi would perform the worst in a severe economic crisis.

Monti Paschi may include 1 billion euros of so-called FRESH convertible bonds in the debt swap, one of the people said. A spokesman for Monte Paschi declined to comment.

Board Meeting

Monte Paschi is holding a board meeting on Thursday to update directors on the changes to its business plan and restructuring options.

Italian Prime Minister Matteo Renzi said last week that he hopes that the bank’s capital-raising will be completed this year. Monte Paschi is seeking to complete the debt conversion, dubbed a liability-management exercise, in the next couple of months in order to carry out a share sale before the end of the year.

Monte Paschi isn’t the only large Italian lender planning to boost capital. UniCredit SpA, led by new Chief Executive Officer Jean Pierre Mustier, is considering tapping shareholders for as much as 5 billion euros, people familiar with the matter said in July.

JPMorgan and Mediobanca will start a search for new anchor investors in Monte Paschi after the debt-swap structure is defined and the bank’s business plan is approved by the lender’s board on Sept. 26, one of the people said.

A financial review of Monte Paschi’s bad-loan portfolio should be completed by October and will determine the size of bridge financing needed to spin off the soured debt, the person said.

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net, Dan Liefgreen in Milan at dliefgreen@bloomberg.net. To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net, Andrew Blackman, Michael Shanahan