Monte Paschi Begins Bondholder "Bail-In": Will Equitize Over €4 Billion In Junior Bonds

Monte Paschi's long anticipated, if largely undesired bail-in is finally a fact.

Ever since the bank failed the ECB's latest stress test this summer, when it was advised that it needs to raise billions in capital, only to see the process fizzle with virtually no willing sources of new cash emerging due to the opaque labyrinth of the bank's bilions on NPLs, Italy's third largest, most insolvent, bank has been hoping to avoid a debt conversion, out of fears it may spook retail bondholders across the capital structure, and in other Italian banks, who may perceive the move even if touted as "voluntary" as a creditor bail-in. Which it technically is.

Earlier today, the bank's board bet on Monday to set the terms for a bond-to-equity conversion that is part of the lender's capital boosting plans. As part of its sweeping restructuring, Monte Paschi was planning to lay off a tenth of its staff, shut branches and sell assets to win investor backing for a 5 billion euros ($5.4 billion) cash call, its third recapitalisation in as many years. The key part, however, due to the lack of new investor interest was the previously leaked voluntary conversion of its subordinated debt, whose successful execution would limit the amount of new funds needed.

Retail investors are estimated to hold some 2 billion euros of Monte dei Paschi's senior subordinated debt. As Reuters reported last month, small investors could be excluded from the conversion, as involving them makes it necessary to publish a prospectus, delaying the offer's launch. However, it now appears that everyone will be "voluntarily" equitized.

"The (conversion) operation will kick off after the shareholder meeting... and there will obviously be a premium offered to market price," A Reuters source added. The conversion plan will also include the Fresh hybrid instrument used to partly finance the costly acquisition of rival Antonveneta in 2007.

Senior debt is not included in the plan.

The bank - assisted by JP Morgan and Mediobanca - is due to hold an extraordinary shareholder meeting on Nov. 24 to approve the turnaround plan that also includes the sale of some 28 billion euros in bad loans at below book value. To underpin the cash call, management at the 544-year old lender has been on road shows to drum up support from potential anchor investors.

Qatar's sovereign wealth fund had allegedly expressed a preliminary interest, however that has not been confirmed. "Next week the road show will continue with a video call with U.S. and Asian investors," the source said. On Sunday, Il Sole 24 Ore said the bank was reaching out to Asian investors, especially Singapore wealth fund Temesek.

So while we wait to learn if Monte Paschi will be successful in raising the critical outside cash, here is what Monte Paschi's bail-in, pardon debt conversion will look like, according to sources including Ansa, Bloomberg and Reuters:

  • Monte Paschi approves voluntary debt-to-equity swap offer
  • Offer to target subordinated bonds for total outstanding amount of 4.289 billion euros; will offer between 20-100 percent of nominal value in bond swap offer
  • Holders of ~€4.5 billion of subordinated bonds will be able to convert them to shares
  • Bank is also considering possibility of launching conversion into equity of 1 billion euros of Fresh 2008 bonds
  • Senior bonds not included in the voluntary conversion plan
  • The bank is also considering conversion plan for EU1b of hybrid bonds
  • The conversion price is seen at 85% of nominal value for riskier Tier 1 bonds, according to Ansa sources.
  • The Conversion price is seen at 100% of nominal value for less risky Tier 2 bonds
  • Monte Paschi will acquire €700m of MPS Capital Trust II securities, also Tier 1, at 20%
  • It will also acquire seven series of BMPS subordinated debt at 100%
  • Offer open to investors classified as “qualified investors” only for Upper Tier 2 securities

In the aftermath of this announcement, keep an eye not so much on the Monte Paschi's stock price, which may jump on the news that the bank will soon have a lower debt load (even if it means diluting the equity) as deposit activity - and especially outflows - at this and other Italian banks.