Just as we warned 4 months ago [6], the oldest bank in the world now faces a critical need to raise EUR2.5 billion in fresh capital - more than double its original plan. "There is no chance on the planet that they can raise [this] in 12 months... they are heading towards nationalization," exclaimed one investment banker, confirmed by another who added via Reuters [7], "it will be difficult to find someone to shell out all that money." The capital raise is equivalent to the entire market cap of the bank currently and it is becoming increasingly clear that the Italian state will be forced to provide the equity. The problem (for BMPS bondholders and depositors) is that under such a scenario, as Bloomberg notes, EC State Aid rules regarding a subordinated-debt bail-in could apply. However, given the small size of sub-debt in the capital structures, it is unclear who will get the haircut including senior bondholders and depositors.
Via Reuters, [7]
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The size of the planned capital increase, which matches the current market capitalization of the bank and was announced by the economy ministry late on Sunday, underlines the problems still confronting Monte Paschi.
The bank could fall under direct state control if it cannot raise sufficient funds from shareholders.
"There's no chance on the planet that they can raise 2.5 billion euros on the market within 12 months. They are heading towards nationalization,"
...
"I don't see how the market could take the news well today. It will be difficult to find someone to shell out all that money as it's not an insignificant amount," a Milan trader said.
Some analysts said the bank's best option to avoid nationalization could be a debt-to-equity swap, converting subordinated bonds it has already issued into shares.
"That would be a hit for bond holders and also for shareholders, but at least it would be fairer on taxpayers and it would be in line with the new bail-in guidelines for banks,"
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As well as the capital hike, the Monte Paschi plan also includes new cost cuts and a gradual reduction in the bank's huge government bond portfolio which totaled 29 billion euros at the end of June
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But, as we previously noted [6], a glance at the capital structure makes it very clear that there will be much more pain in the capital structure than simply sub-debt holders...
A quick glance at BMPS' capital structure shows that there isn't a whole lot (read: almost any) of impairable securities below the unsecured liability (i.e., deposit) level.
[8]
It is also obvious that when the bad debt impairment begins and depositors start getting whacked at least senior bonds, which should be pari passu, will feel the pain too as per the Diesel-BOOM doctrine, although we doubt this particular case of pain sharing will bring much comfort to any and all uninsured depositors in the oldest bank in the world.
So it's time to apply that non-template 'template' it would seem