Monte Paschi "Scrambles" With Last Minute Capital Increase To Avoid Nationalization

Having picked a new prime minister to replace Matteo Renzi, when as reported this morning Italian president Sergio Mattarella asked Foreign Minister Paolo Gentiloni, a loyalist from Renzi's Democratic Party, to form a new government, the chaos surrounding Italy's political future appears to be subsiding, which as we said this morning, is welcome news for the future of Monte Paschi, as Italy's third largest bank may once again avoid a state bailout should enough private investors turn up and inject funds into the failing financial institution, the world's oldest.

So it comes as no surprise that, facing a third nationalization in just a few years, Bloomberg reports that Banca Monte dei Paschi di Siena plans to step up efforts to win investors for a debt-for-equity swap in the coming days, and will once again press ahead with a €5 billion capital raise to avoid a state rescue that would impose losses on bondholders and shareholders, an outcome the ECB suggested on Friday would be unavoidable absent a private sector rescue.

Bloomberg adds that the bank's board is meeting Sunday to review a fresh offer for note holders that would allow more retail investors to participate after money managers already swapped €1.02b, although it remains unclear why more investors would take on the bank's offer.

Following the swap, a stock sale to an anchor investor and a public share placement would follow, to complete the full capital raise.

Meanwhile, Reuters writes that Monte Paschi was "scrambling on Sunday to thrash out a last-ditch plan to raise €5 billion on the market by year-end after the European Central Bank refused to give it more time to recapitalize." Rome is ready to intervene with an emergency decree to rescue the bank if needed, a government source said on Friday. Such an intervention would impose losses on bondholders as per European bail-in regulations.

As Bloomberg has now confirmed, the eleventh-hour private solution being drawn up by the bank, advised by JPMorgan and Mediobanca, involves reopening a debt-to-equity swap offer to 40,000 retail investors holding 2.1 billion euros of the bank's subordinated bonds, but this needs the approval of market watchdog Consob. The initial offer, which raised 1 billion euros from institutional investors, had been deemed too risky for the vast majority of ordinary investors.

A major wildcard is whether Qatar, long seen as an anchor investor would provide as much as €1 billion in fresh capital. Under the plan, Qatar's sovereign wealth fund could put in another 1 billion euros, while a consortium of banks would try sell shares for the remainder in the market but without underwriting the issue, a senior banking source said.

As Monte dei Paschi's board met on Sunday, a source close to the board said the fact that Gentiloni had been asked to form a government gave the bank confidence it could still pull off the privately funded capital raise. "There's still time. Qatar is in the game and available to put in the amount that is being talked about," the source said.

The Reuters source added the bank had been in contact with Consob since Friday to discuss the reopening of the debt swap, a politically sensitive move that could expose the lender and the market watchdog to accusations of bending the rules.

Some more details:

Another source said no decision would be taken before the ECB formally communicates its rejection of the bank's request for an extension, which should happen early this week. According to the senior banker, the lender would argue that under European rules, retail investors risked losing all their money if the state had to intervene, so they would be better off converting their bonds.


The bank's fate is a political hot potato in Italy.

The Monte Paschi rescue has become a political hot potato topic: Luigi Di Maio, a leader of the anti-establishment 5-Star Movement that is ahead in opinion polls, said on Sunday the bank should be nationalized while accusing Renzi's Democratic Party (PD) of using the crisis to rebuff calls for snap polls and justify the need for a quick, unelected government.

PD Chairman Matteo Orfini said: "The market solution is the best. Should it not succeed, the bank must be stabilized while respecting EU rules."

That said, if indeed the flux surrounding the fate of the Italian government has been resolved, Monte Paschi may just have avoided yet another nationalization if only for the time being. As for Qatar making any return on its €1 billion investment, funds which will promptly be soaked up by even more bad debt losses, we wouldn't hold our breath.