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Moody's reviews Banca Monte dei Paschi di Siena's long-term deposit and senior unsecured ratings for downgrade
Related Issuers
Banca Monte dei Paschi di Siena S.p.A.
Banca Monte dei Paschi di Siena, London
MPS Capital Services
MPS Capital Trust I
Related Research
Credit Opinion: MPS Capital Services: High Correlation With Parent Monte dei Paschi
Credit Opinion: Banca Monte dei Paschi di Siena S.p.A.: Review With Direction Uncertain Balances Credit Positive Restructuring Plan and High Execution Risk
Credit Opinion: MPS Capital Services
Credit Opinion: Banca Monte dei Paschi di Siena S.p.A.
Issuer In-Depth: Banca Monte dei Paschi di Siena S.p.A.: Limited Upside for Business Plan That Will Follow Challenging Restructuring
Rating Action:
Moody's reviews Banca Monte dei Paschi di Siena's long-term deposit and senior unsecured ratings for downgrade
Global Credit Research - 15 Jul 2016
Review prompted by increasing need for external support; standalone BCA downgraded to ca
London, 15 July 2016 -- Moody's Investors Service has today placed on review for downgrade Banca Monte dei Paschi di Siena S.p.A.'s (Montepaschi) B2 long-term deposit rating and B3 long-term senior unsecured ratings. This reflects the rating agency's view of the increasing likelihood that the bank will require external support. While Moody's believes that any support will be designed to benefit senior debt and deposits, this is still subject to significant uncertainty, and the gradual run-off of the bank's senior unsecured bonds may expose them to greater loss over time.
The rating agency has also downgraded Montepaschi's standalone baseline credit assessment (BCA) by two notches to ca from caa2. This also reflects the high probability that the bank will need external support in order to meet minimum prudential requirements while complying with the stated intention of the European Central Bank (ECB) to request a reduction in the bank's stock of problem loans.
Moody's has also downgraded Montepaschi's subordinate and junior subordinate ratings to Ca and Ca(hyb) respectively, from Caa3 and Caa3(hyb), reflecting the agency's view that these securities will likely be subject to significant loss in the event of the bank receiving external support, absent any dispensation from current EU rules.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
--- LOWER BCA REFLECTS HIGHER NEED FOR EXTERNAL SUPPORT
Moody's said that the two-notch downgrade of Montepaschi's BCA to ca from caa2 was driven by an increased probability that the bank will require external support to comply with the ECB's intended request for a reduction in the bank's stock of problem loans.
On 4 July 2016, Montepaschi announced that the ECB had notified the bank of its intention to request a reduction in the bank's stock of problem loans; Montepaschi's press release does not contain any information regarding the consequences for the bank if it did not meet the targets set by the ECB.
The ECB's notification envisaged that the bank reduce its current stock of problem loans (EUR47.2 billion as of March 2016) to a maximum of EUR43.4 billion by December 2016, EUR38.9 billion by December 2017, and EUR32.6 billion by December 2018. The ECB's notification also implies that Montepaschi will need to increase its coverage of problem loans to 55% in 2018 from 49% at present. The ECB also requested Montepaschi to submit by 3 October 2016 a plan to reduce its problem loan stock to a maximum of 20% of total gross loans by 2020, from 34.4% at present. These targets are more demanding than Montepaschi's current business plan, in which the bank stated its aim to reduce its problem loan ratio to 26% by 2018.
The impact on capital resulting from the reduction in the bank's large stock of problem loans depends on the price to which the assets will be written down or sold. While the secondary market for problem loans has recently picked up in Italy, Moody's considers that it is not large enough to absorb Montepaschi's problem loans, and prices therefore remain uncertain. Moody's estimates that the disposal of problem loans would lead to a capital shortfall that could be in the range of EUR2 billion to EUR5 billion.
Given current market volatility, in Moody's view Montepaschi has little capacity to raise private capital without external support.
-- INCREASED PROBABILITY OF BURDEN-SHARING WITH SUBORDINATED BONDHOLDERS
Moody's notes that the press has widely reported that the Italian government seems to be working on a public sector solution that would avoid bailing-in senior creditors. Any potential support will need to fit within the recently-approved resolution framework (Bank Recovery and Resolution Directive, or BRRD) as well as with the European Commission's (EC) state aid guidelines. These rules leave some room for interpretation, but nonetheless constrain national governments' ability to extend aid without conditions.
In the meantime, the private-sector bank rescue fund (Atlante) may not be able to provide the level of support that Montepaschi potentially requires, given that Atlante's remaining resources are now limited to less than EUR2 billion. This means that Montepaschi may need to resort to state aid, but the EC's framework published in 2013 anticipates the imposition of losses on subordinated bondholders in return for any such support. For this reason, these bondholders now face a very high level of risk, leading Moody's to downgrade dated subordinated and junior subordinated debt to Ca and Ca(hyb) respectively, from Caa3 and Caa3(hyb). The bank's total subordinated debt amounts to about EUR5 billion, including EUR0.6 billion of Additional Tier 1 instrument, as of March 2016.
-- RISK FOR JUNIOR DEPOSITORS AND SENIOR BONDHOLDERS WILL DEPEND ON THE FORM OF SUPPORT THAT THEY WILL RECEIVE, AND THE FUTURE STOCK OF BAIL-IN-ABLE DEBT
Moody's said that, on the other hand, Montepaschi's senior bondholders and depositors are likely to benefit from a combination of the loss absorption provided by subordinated debt, and any external support. For these reasons, the senior long-term debt and deposit ratings now incorporate a high likelihood of government support, resulting in two notches of uplift, on top of two and three notches of uplift respectively in view of their very low and extremely low loss-given-failure. Nevertheless, Moody's placed these ratings on review for downgrade, given the high degree of uncertainty relating to the provision of this support, and the expected reduction in the stock of the bank's bail-in-able debt over the coming quarters. This reflects in turn the limited appetite of Italian retail investors to continue to purchase bank bonds, and the low likelihood of more risk-sensitive wholesale investors subscribing to any new bond issues by Montepaschi. These factors will likely result in increased risk for these instruments over time.
FACTORS THAT COULD LEAD TO AN UPGRADE/DOWNGRADE
An upgrade in the BCA could arise in the event of the bank significantly increasing its capital and/or reducing its bad loans, mostly likely as a result of external support. A further downgrade in the BCA to c is unlikely unless the bank were likely to be placed in liquidation. Any change in the BCA would likely lead to changes in ratings, depending on the expected treatment of each instrument as a result of external support.
The ratings on subordinated debt could be upgraded if the bank received external support without being required to write down these securities, but Moody's considers this unlikely. The ratings on long-term senior unsecured debt and deposits are unlikely to be upgraded given the agency's review for downgrade, but could be affirmed in the event of the bank receiving external support without impacting these instruments. The ratings on long-term senior unsecured debt and deposits could be downgraded should any external support leave these instruments more exposed to loss than previously, e.g. were the bank's balance sheet to remain relatively weak and loss-absorbing debt to reduce.
LIST OF AFFECTED RATINGS
Issuer: Banca Monte dei Paschi di Siena S.p.A.
..Downgrades:
....Baseline Credit Assessment, downgraded to ca from caa2
....Adjusted Baseline Credit Assessment, downgraded to ca from caa2
....Subordinate Regular Bond/Debenture, downgraded to Ca from Caa3
....Subordinate Medium-Term Note Program, downgraded to (P)Ca from (P)Caa3
....Junior Subordinated Regular Bond/Debenture, downgraded to Ca(hyb) from Caa3(hyb)
..Placed on Review for Downgrade:
....Long-Term Bank Deposits, currently B2, outlook changed to Rating under Review from Negative
....Senior Unsecured Regular Bond/Debenture, currently B3, outlook changed to Rating under Review from Negative
....Senior Unsecured Medium-Term Note Program, currently (P)B3
....Long-term Counterparty Risk Assessment, currently B2(cr)
..Affirmations:
....Short-term Bank Deposits, affirmed NP
....Other Short Term, affirmed (P)NP
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
..Outlook Actions:
....Outlook changed to Rating under Review from Negative
Issuer: MPS Capital Services
..Downgrades:
....Baseline Credit Assessment, downgraded to ca from caa2
....Adjusted Baseline Credit Assessment, downgraded to ca from caa2
..Placed on Review for Downgrade:
....Long-term Bank Deposits, currently B2, outlook changed to Rating under Review from Negative
....Long-term Counterparty Risk Assessment , currently B2(cr)
..Affirmations:
....Short-term Bank Deposits, affirmed NP
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
..Outlook Actions:
....Outlook changed to Rating under Review from Negative
Issuer: MPS Capital Trust I
..Affirmations:
....Backed Pref. Stock Non-cumulative, affirmed C(hyb)
..Outlook Actions:
....No Outlook
Issuer: Banca Monte dei Paschi di Siena, London
..Placed on Review for Downgrade:
....Long-term Counterparty Risk Assessment, currently B2(cr)
..Affirmations:
....Short-term Deposit Note/CD Program, affirmed NP
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
..Outlook Actions:
....No Outlook
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
Saluti,
Moody's reviews Banca Monte dei Paschi di Siena's long-term deposit and senior unsecured ratings for downgrade
Related Issuers
Banca Monte dei Paschi di Siena S.p.A.
Banca Monte dei Paschi di Siena, London
MPS Capital Services
MPS Capital Trust I
Related Research
Rating Action:
Moody's reviews Banca Monte dei Paschi di Siena's long-term deposit and senior unsecured ratings for downgrade
Global Credit Research - 15 Jul 2016
Review prompted by increasing need for external support; standalone BCA downgraded to ca
London, 15 July 2016 -- Moody's Investors Service has today placed on review for downgrade Banca Monte dei Paschi di Siena S.p.A.'s (Montepaschi) B2 long-term deposit rating and B3 long-term senior unsecured ratings. This reflects the rating agency's view of the increasing likelihood that the bank will require external support. While Moody's believes that any support will be designed to benefit senior debt and deposits, this is still subject to significant uncertainty, and the gradual run-off of the bank's senior unsecured bonds may expose them to greater loss over time.
The rating agency has also downgraded Montepaschi's standalone baseline credit assessment (BCA) by two notches to ca from caa2. This also reflects the high probability that the bank will need external support in order to meet minimum prudential requirements while complying with the stated intention of the European Central Bank (ECB) to request a reduction in the bank's stock of problem loans.
Moody's has also downgraded Montepaschi's subordinate and junior subordinate ratings to Ca and Ca(hyb) respectively, from Caa3 and Caa3(hyb), reflecting the agency's view that these securities will likely be subject to significant loss in the event of the bank receiving external support, absent any dispensation from current EU rules.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
--- LOWER BCA REFLECTS HIGHER NEED FOR EXTERNAL SUPPORT
Moody's said that the two-notch downgrade of Montepaschi's BCA to ca from caa2 was driven by an increased probability that the bank will require external support to comply with the ECB's intended request for a reduction in the bank's stock of problem loans.
On 4 July 2016, Montepaschi announced that the ECB had notified the bank of its intention to request a reduction in the bank's stock of problem loans; Montepaschi's press release does not contain any information regarding the consequences for the bank if it did not meet the targets set by the ECB.
The ECB's notification envisaged that the bank reduce its current stock of problem loans (EUR47.2 billion as of March 2016) to a maximum of EUR43.4 billion by December 2016, EUR38.9 billion by December 2017, and EUR32.6 billion by December 2018. The ECB's notification also implies that Montepaschi will need to increase its coverage of problem loans to 55% in 2018 from 49% at present. The ECB also requested Montepaschi to submit by 3 October 2016 a plan to reduce its problem loan stock to a maximum of 20% of total gross loans by 2020, from 34.4% at present. These targets are more demanding than Montepaschi's current business plan, in which the bank stated its aim to reduce its problem loan ratio to 26% by 2018.
The impact on capital resulting from the reduction in the bank's large stock of problem loans depends on the price to which the assets will be written down or sold. While the secondary market for problem loans has recently picked up in Italy, Moody's considers that it is not large enough to absorb Montepaschi's problem loans, and prices therefore remain uncertain. Moody's estimates that the disposal of problem loans would lead to a capital shortfall that could be in the range of EUR2 billion to EUR5 billion.
Given current market volatility, in Moody's view Montepaschi has little capacity to raise private capital without external support.
-- INCREASED PROBABILITY OF BURDEN-SHARING WITH SUBORDINATED BONDHOLDERS
Moody's notes that the press has widely reported that the Italian government seems to be working on a public sector solution that would avoid bailing-in senior creditors. Any potential support will need to fit within the recently-approved resolution framework (Bank Recovery and Resolution Directive, or BRRD) as well as with the European Commission's (EC) state aid guidelines. These rules leave some room for interpretation, but nonetheless constrain national governments' ability to extend aid without conditions.
In the meantime, the private-sector bank rescue fund (Atlante) may not be able to provide the level of support that Montepaschi potentially requires, given that Atlante's remaining resources are now limited to less than EUR2 billion. This means that Montepaschi may need to resort to state aid, but the EC's framework published in 2013 anticipates the imposition of losses on subordinated bondholders in return for any such support. For this reason, these bondholders now face a very high level of risk, leading Moody's to downgrade dated subordinated and junior subordinated debt to Ca and Ca(hyb) respectively, from Caa3 and Caa3(hyb). The bank's total subordinated debt amounts to about EUR5 billion, including EUR0.6 billion of Additional Tier 1 instrument, as of March 2016.
-- RISK FOR JUNIOR DEPOSITORS AND SENIOR BONDHOLDERS WILL DEPEND ON THE FORM OF SUPPORT THAT THEY WILL RECEIVE, AND THE FUTURE STOCK OF BAIL-IN-ABLE DEBT
Moody's said that, on the other hand, Montepaschi's senior bondholders and depositors are likely to benefit from a combination of the loss absorption provided by subordinated debt, and any external support. For these reasons, the senior long-term debt and deposit ratings now incorporate a high likelihood of government support, resulting in two notches of uplift, on top of two and three notches of uplift respectively in view of their very low and extremely low loss-given-failure. Nevertheless, Moody's placed these ratings on review for downgrade, given the high degree of uncertainty relating to the provision of this support, and the expected reduction in the stock of the bank's bail-in-able debt over the coming quarters. This reflects in turn the limited appetite of Italian retail investors to continue to purchase bank bonds, and the low likelihood of more risk-sensitive wholesale investors subscribing to any new bond issues by Montepaschi. These factors will likely result in increased risk for these instruments over time.
FACTORS THAT COULD LEAD TO AN UPGRADE/DOWNGRADE
An upgrade in the BCA could arise in the event of the bank significantly increasing its capital and/or reducing its bad loans, mostly likely as a result of external support. A further downgrade in the BCA to c is unlikely unless the bank were likely to be placed in liquidation. Any change in the BCA would likely lead to changes in ratings, depending on the expected treatment of each instrument as a result of external support.
The ratings on subordinated debt could be upgraded if the bank received external support without being required to write down these securities, but Moody's considers this unlikely. The ratings on long-term senior unsecured debt and deposits are unlikely to be upgraded given the agency's review for downgrade, but could be affirmed in the event of the bank receiving external support without impacting these instruments. The ratings on long-term senior unsecured debt and deposits could be downgraded should any external support leave these instruments more exposed to loss than previously, e.g. were the bank's balance sheet to remain relatively weak and loss-absorbing debt to reduce.
LIST OF AFFECTED RATINGS
Issuer: Banca Monte dei Paschi di Siena S.p.A.
..Downgrades:
....Baseline Credit Assessment, downgraded to ca from caa2
....Adjusted Baseline Credit Assessment, downgraded to ca from caa2
....Subordinate Regular Bond/Debenture, downgraded to Ca from Caa3
....Subordinate Medium-Term Note Program, downgraded to (P)Ca from (P)Caa3
....Junior Subordinated Regular Bond/Debenture, downgraded to Ca(hyb) from Caa3(hyb)
..Placed on Review for Downgrade:
....Long-Term Bank Deposits, currently B2, outlook changed to Rating under Review from Negative
....Senior Unsecured Regular Bond/Debenture, currently B3, outlook changed to Rating under Review from Negative
....Senior Unsecured Medium-Term Note Program, currently (P)B3
....Long-term Counterparty Risk Assessment, currently B2(cr)
..Affirmations:
....Short-term Bank Deposits, affirmed NP
....Other Short Term, affirmed (P)NP
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
..Outlook Actions:
....Outlook changed to Rating under Review from Negative
Issuer: MPS Capital Services
..Downgrades:
....Baseline Credit Assessment, downgraded to ca from caa2
....Adjusted Baseline Credit Assessment, downgraded to ca from caa2
..Placed on Review for Downgrade:
....Long-term Bank Deposits, currently B2, outlook changed to Rating under Review from Negative
....Long-term Counterparty Risk Assessment , currently B2(cr)
..Affirmations:
....Short-term Bank Deposits, affirmed NP
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
..Outlook Actions:
....Outlook changed to Rating under Review from Negative
Issuer: MPS Capital Trust I
..Affirmations:
....Backed Pref. Stock Non-cumulative, affirmed C(hyb)
..Outlook Actions:
....No Outlook
Issuer: Banca Monte dei Paschi di Siena, London
..Placed on Review for Downgrade:
....Long-term Counterparty Risk Assessment, currently B2(cr)
..Affirmations:
....Short-term Deposit Note/CD Program, affirmed NP
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
..Outlook Actions:
....No Outlook
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
