The new CEO of Monte dei Paschi, Marco Morelli, threw open the possibility of a voluntary debt-for-equity swap last month, as a deteriorating share price complicates efforts to recapitalize Italy’s biggest banking sore.
The announcement followed a decision earlier in September to get rid of Fabrizio Viola, CEO for the past four years, as a third rights issue in as many years threatened to wipe out the equity Viola raised in issues of €3 billion in 2015 and €5 billion in 2014.
The CEO change and shift in strategy for the recap came just six weeks into MPS’ efforts to return the bank to health after it spectacularly failed an ECB stress test.
Following earlier pressure from the ECB to cut net non-performing loans by €10 billion in two years, MPS hopes to transfer and de-recognise its entire €27.7 billion bad-debt portfolio through a securitization programme supported by state guarantees over the senior tranches and underwriting of mezzanine tranches by the sector-funded rescue fund, Atlante.
The capital gap from offloading loans at 33% of gross book value was to be funded by a new issue of up to €5 billion, with pre-emptive rights, and supported by a pre-underwriting agreement with a consortium coordinated by seven international banks plus Mediobanca.
The new CEO asking for what will now be a hopefully reduced rights issue is the former country head for Italy at Bank of America Merrill Lynch (one of the issue’s coordinators) and before that the equivalent at JPMorgan.
The turmoil has also led to the exit of MPS chairman Massimo Tononi, who took over late last year from former UniCredit CEO Alessandro Profumo (now chairman and owner of Milanese broker Equita).
“Fabrizio Viola (pictured) already did a lot of what other Italian banks
Neither Viola’s nor Tononi’s departures stemmed September’s downward tide of MPS shares, which had already dropped 50% in the previous four weeks following the plan’s announcement.
Markets were increasingly sceptical, as a result, that a rights issue anywhere near as big as €5 billion was feasible. Its failure could lead to a bail-in that would ensnare retail investors and scupper Italy’s fragile political stability.
From the plan’s announcement to late September, MPS’ market capitalization fell from around a fifth to one tenth of the proposed issue, notes Luigi Tramontana, banks analyst at Banca Akros.
He draws a contrast with UniCredit, which is also thought to be considering a rights issue that will still be a fraction, rather than a multiple, of its existing market cap.
MPS’ shares perked up slightly, however, on news of the debt-for-equity exchange.
“It’s clear now that it will not be possible to place €5 billion of new shares in the market,” says Tramontana, in advance of news of the debt-for-equity swap. Such opinion fuelled rumours that the consortium was considering an alternative plan, which might be closer to one plan put forward in late July (though without publicly disclosed details) by UBS and former Intesa Sanpaolo CEO Corrado Passera.
No one has denied any scheme to rescue MPS is extremely hard to pull off. One of the bookrunners compared the plan for a rights issue of up to €5 billion to a fixed-price IPO. Even sovereign wealth funds, which might ordinarily act as anchors in a deal like this, will be circumspect, given the situation in Italy and their home markets.
Even as it said it could rely partly on the liability management exercise, the bank said it was sticking to the goals it outlined in the plan in late July. Those involved in the deal also admit privately that asking investors to stump up new capital after the same CEO (Viola) had already received so much new equity would have been a lot to expect. This is despite a consensus that, operationally, Viola made the best out of a bad situation, and prioritized the interests of his shareholders.
A lot done
“The bank is profitable again – not very profitable, but at least it’s stopped losing money,” says Tramontana. “He [Viola] already did a lot of what other Italian banks will have to do in the coming years.” Tramontana notes Viola managed not just to cut staff and branches, but also to find a compromise with international counterparties necessary to unwind costly derivative transactions linked to its government bond portfolio.
Effective day-to-day oversight, however, was clearly not enough. Investors could easily ask, says a banker involved, why Viola did not do something more radical after previous rights issues: perhaps figuring out a way to sell the bank, relying less on an improvement in the economy. Only a year ago, when rumours were still rife of a merger with Bergamo-based cooperative lender UBI Banca, MPS’s market cap was eight times bigger than it is today.
Whoever the management, the basic condition for a rights issue remains the securitization. If it works, the bank could be left with no bad debt, and a slimmed-down cost base: perhaps making it a more attractive investment than UniCredit, for example. Preparation for this securitization is therefore a main priority – not an easy or quick job, and involves trawling through hundreds of thousands of credit lines.