Italian banking: Monte dei Paschi mayhem returns

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The Italian lender’s revised capital plan prompted its share price to plunge 39% in a matter of hours. Time is running out for a capital raise by year-end.

That Banca Monte dei Paschi di Siena’s July plan to raise €5 billion via a rights issue before year-end is unworkable seems to have come as a surprise to no-one but the bank’s own shareholders. When the plan, led by JPMorgan and Mediobanca, was revealed the feasibility of the capital raise was immediately questioned – not one of the bankers and investors that Euromoney spoke to at the time felt that it would happen.

Marco Morelli 160x186
Marco Morelli,
CEO of MPS
When the bank’s new chief executive, Marco Morelli, presented its new capital plan on October 25 it was, therefore,  hardly a shock that instead of a €5 billion rights issue the bank now wants to undertake a liability management exercise (LME) and source cornerstone investors to reduce the amount it will then have to raise from the market. The LME involves a voluntary debt-for-equity swap of both retail and institutional subordinated investors that could raise €2 billion.

Despite this, the MPS share price endured an extraordinary day on October 25, rising 20% on news of a new plan, but ending the day 15% down by the close after trading was suspended: an intraday high to low change of 39%.

The wild gyration in the share price has been attributed to the fact that the new plan was followed by news of 2,500 job losses, staff cost cutting of 10% and the shuttering of 500 of its 2,000 branches over the next three years. The announcement of job cuts at a bank that is on its third rescue attempt and needs to raise €5 billion before year-end can hardly be unexpected and it seems more likely that the market simply doesn’t believe that the revised capital plan is workable either.

It probably isn’t – and MPS (albeit amply aided by Deutsche Bank) seems to be dragging Europe ever closer to crossing the rubicon of state aid to shore up its ailing banking sector. The shortcomings of the Bank Recovery and Resolution Directive have been brutally exposed in Italy – and in particular by MPS – and its attempts to recapitalize are sounding increasingly desperate. Morelli says that there is "maximum openness" at the bank to consider an offer from "anyone who could give a contribution to the plan". Roughly translated that sounds like: "Has anyone got any other ideas?"

Corrado Passera 160x186
Corrado Passera,
ex-CEO of Intesa SanPaolo
 
One person who has is Corrado Passera, ex-CEO of Intesa SanPaolo, who was, together with UBS, already pitching a plan back in July that looks very similar to Morelli’s new one. Another person with an idea is Adam Lerrick, a sovereign debt and bank rescue specialist at the American Enterprise Institute, who suggests that a temporary bail-in of subordinated bondholders would be possible under BRRD. This would facilitate a debt-for-equity swap that could subsequently be reversed if sufficient capital can be raised elsewhere. It would turn existing bank bonds into contingent capital, but it might be the Italian lender’s best option right now.