Italian bank shares shot up by 20% in the 10 days following the unveiling in April of Atlas, a self-financed fund designed to backstop capital raisings and fund bad-debt sales. Doubts remain, however, over its ability to prevent a downward spiral, given its size relative to Italy’s €200 billion bad-debt pile.
Atlas will have a capitalization of between €4 billion and €6 billion, according to Intesa Sanpaolo, its biggest contributor alongside UniCredit. Italy’s two biggest banks are putting in around €1 billion each, while other banks, insurance companies and banking foundations will put in smaller amounts.
The immediate aim is to prevent a domino effect if new senior-bond and depositor bail-in rules are applied in the event of a failure of ECB-mandated capital raisings for two troubled mutual banks: Banco Popolare di Vicenza (which is raising €1.5 billion) and Veneto Banca (raising €1 billion). When valuations were healthier last year, UniCredit and Intesa Sanpaolo agreed to act as underwriters for Vicenza and Veneto, respectively, though likely both with get-out clauses, say market sources.
Despite hopes Vicenza will still be able to call on some clients loyal enough to put more money into the bank’s shares, the fund’s first step is to sub-underwrite Vicenza’s IPO, launched in April.
That helps UniCredit, whose share price and additional tier-1 bonds were under pressure in the run-up to the ECB’s end-of-April deadline for Vicenza’s capital raising, according to Credit Sights Veneto’s deadline is later.The fund will in addition bring what Intesa Sanpaolo thinks could be a structural solution to the Italian bad-debt problem.
At least 30% of the fund, on top of anything left from bank capital recapitalizations, is destined for junior tranches of bad-debt securitizations. Under a scheme announced earlier this year, the government can guarantee senior tranches.Quaestio, a little-known fund manager with around €10 billion under management, is launching Atlas, partly as the ECB was seen to be averse to using firms with close ties to the investors – in other words all the bigger Italian asset managers. Alessandro Penati, previously a respected finance professor, is Quaestio’s chairman and one of its main shareholders.
Atlas is, at origin, thought to be the brainchild of Cassa Depositi e Prestiti – and in particular its ex-Goldman Sachs chairman, Claudio Costamagna. CDP itself, however, will struggle to put in more than around €500 million, for fear of contravening EU state-aid rules. Bank of America Merrill Lynch was called in to advise on the project in March.
Another key to maintaining the fund’s private-sector character is that it aims to give investors what Quaestio said would be attractive returns, even if its targets are likely to be well below what distressed-debt investors would seek (typically between 20% and 30%).
The Italian government welcomed Atlas with promises of new laws to cut bad-debt recovery times. But some say the fund is another sign of how the authorities are leaning on healthier banks to prop up weaker rivals. UBI Banca and Banca Popolare di Milano, for example, will contribute €200 million and €100 million respectively, while Monte dei Paschi di Siena is only putting in €50 million, although by assets it is bigger.
Banks now have the opportunity to sell bad debts at higher prices than investors such as US private equity investors could offer, potentially removing the need for dilutive capital raisings. Banca Carige confirmed in March that Apollo had offered to buy its bad debt and fill a resulting capital hole by buying up most of a €550 million capital increase. The banks’ shareholders seem to have baulked at the prospect.
Vicenza said Fortress has been circling it too. Nevertheless, analysts argue Atlas is too small to resolve Italy’s non-performing-loan problem on its own, particularly given the average gap between book and market value for the debt is so large: around 10 cents on the euro, according to research from Bernstein, even with the new securitization framework.
On the basis of prevailing debt-collection times, the fund should be around four times bigger, according to Bernstein: €10 billion to underwrite recapitalizations, and €10 billion to fund bad-debt securitizations. Other banks, including small mutual lenders suffering from the legacy of poor governance will also need recapitalizing, says Fabrizio Bernardi, banks analyst at Fidentiis.
MPS has a capital shortfall of at least €2 billion and as much as €5.4 billion in an adverse scenario, according to Berenberg. Banco Popolare also has to raise €1 billion as the ECB’s condition on its merger with Banco Popolare di Milano, announced in March.
“Atlas is not a turning point; it’s a temporary solution of last resort,” says Bernardi.There is some hope that Atlas could make a gain on its investments, particularly if banks like Vicenza are able to make efficiency savings by merging. Banco Popolare’s bookrunners will make similar arguments during its capital raising, hopefully to avoid relying on Atlas. Even Veneto Banca will not need to use Atlas for its equity raising, statements from Intesa Sanpaolo suggest.
According to a source familiar with the fund’s thinking, with €3 billion left after the capital raisings, Atlas could fund the junior tranche of securitizations to allow banks to deconsolidate up to €70 billion of bad debt covered at between 70% and 75%.