Paschi Stock Sale Hangs in Balance as Italy Said to Weigh Aid

(Bloomberg) -- Banca Monte dei Paschi di Siena SpA is making a final push to sway investors to back the lender as a political vacuum in Italy chills demand and brings the bank a step closer to state aid.

Executives are considering options including a limited form of state help as well as an extension of a European Central Bank deadline to complete its 5 billion-euro ($5.4 billion) capital increase, people with knowledge of the matter said. Monte Paschi advisers are continuing to talk with potential investors, including sovereign-wealth funds, they said, as Prime Minister Matteo Renzi’s resignation increases uncertainty about Italy’s leadership. Officials from the bank are meeting with ECB leaders Monday, one person said.

The government is working on a so-called precautionary recapitalization that could be approved as early as next week if the private funding plan fails, said people familiar with the process. The plan would comply with the European Union’s bank-resolution rules on burden sharing, the people said. Under those rules, governments can bolster lenders facing capital shortages if they also impose some losses on shareholders and bondholders. Some shares and junior notes may see their value fall to zero, one of the people said.

An official from Renzi’s office didn’t respond to a request for comment.

“The probability of finding a natural market solution is very very low currently, due to the fact that instability implies that international investors have a lot of difficulties to decide in the short term for a very important recapitalization,” Marcello Messori, economics professor at Luiss University, said in a Bloomberg TV interview with Francine Lacqua. The ECB may give more time “if there is a solution on the horizon.”

Monte Paschi fell for the fourth consecutive day in Milan trading, extending the decline for this year to 85 percent. Shares plunged as much as 4.2 percent and were down 3.2 percent at 18.08 euros as of 1:09 p.m.

Swap Success

Bondholders agreed to convert almost a quarter of the 4.3 billion euros of debt offered subject to the swap, according to final results released Tuesday by the Siena, Italy-based bank. That was before Italians rejected proposed constitutional reforms in a Sunday referendum, setting off political turmoil and prompting Renzi to say he will resign.

The swap was “a very good result, but what’s crucial for the success of the deal is the commitment from anchor investors,” Fabrizio Spagna, managing director at Axia Financial Research in Padua, Italy, said by phone. “I’m skeptical that there are subjects available to subscribe the equity, and the outcome of the referendum may add pressure.”

The debt for stock exchange is one of the three main interlocking pieces the capital increase, which also would include a cash infusion from anchor investors and a share sale. The funds raised will be used to cover losses from the divestment of soured loans, a move requested by the ECB. Failure could force Monte Paschi into resolution, which could mean losses for shareholders and bondholders and reverberate across Europe.

“With an uncertain political situation and the need to complete the 5 billion-euro recapitalization by the end of the year, we consider the precautionary recapitalization from the state with burden sharing as the most likely scenario for MPS,” Manuela Meroni an analyst at Banca IMI SpA, wrote in a note Tuesday.

Capital Increase

Monte Paschi will decide within the next few days whether it will proceed with a planned capital increase, people with knowledge of the matter said. The underwriters, who met with the bank’s executives on Monday, are still waiting for a formal commitment from possible anchor investors, the people said, asking not to be identified because the matter is private. Potential investors are seeking more time to review the political situation after the referendum, according to the people.

“The fact that markets have not reacted particularly negatively to the referendum decision leaves us hopeful that the recapitalization plan for Monte Paschi can go through,” Yoram Gutgeld, economic adviser to Renzi, said in Bloomberg Television interview with Lacqua from Rome. “The discussion with the ECB can also be important to understand what is the best timeline for making the recapitalization plan come through.”

Monte Paschi was set to meet with Qatar Investment Authority on Monday to discuss a preliminary investment agreement, Il Sole 24 Ore reported Sunday. Italy’s political vacuum threatens to usher in a period of uncertainty that may weigh on plans to reduce a pile of bad loans estimated at 360 billion euros.

--With assistance from Dan Liefgreen Tom Beardsworth Ross Larsen Francesca Cinelli Francine Lacqua and Esteban Duarte To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net, Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net. To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Ross Larsen, Jon Menon