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Monte dei Paschi bondholders face big hit as rescue
Bondholders could take a hit in the first significant bail-in of a large bank's creditors under European resolution laws if Italian political turmoil sinks the planned €5 billion recapitalization of Banca Monte dei Paschi di Siena SpA.
The troubled lender is scrambling to secure a state bailout before the end of the year after the country rejected constitutional reform in a Dec. 4 referendum, prompting Prime Minister Matteo Renzi to tender his resignation and spreading misgivings among private investors including Qatar's sovereign wealth fund who had planned to pump capital into Italy's third-largest listed bank by assets.
Hybrid and subordinated debts may now be wiped out, and retail bondholders may have to show they were missold savings products to escape being written off, said an official at Consob, Italy's finance regulator, who asked not to be named. Under European rules, private bondholders must be bailed in before state money can be provided to save a failing bank.
"My view is that burden-sharing will come into business; first we will have bail-in and afterwards the bail-out," the Consob official said.
At September-end Monte dei Paschi had €5.07 billion in outstanding subordinated debt, as well as €24.6 billion in senior unsecured bonds and notes and €10 million in convertible paper.
At least €2 billion of the bank's debt securities are in the hands of retail investors but the number could be as high as €4 billion, a buy-side analyst who also asked to remain anonymous said in an interview. Many are likely to get burned in what is now likely to be a bail-in, he said.
"It's going to be noisy," he said. "I expect the bank will try to buy some time."
Retail bondholders are a politically sensitive group in Italy, due to the previously widespread practice of selling bank bonds as investible retirement assets to private citizens. In a widely-publicized case in 2015, a pensioner committed suicide after his life savings of €100,000 were erased by a similar bail-in at Banca Etruria.
"On a case by case basis they will help some retail investors," the Consob source said, adding that regulators suspected Monte dei Paschi treated some vulnerable customers unfairly. "I think that it could be something related to miss-selling or MiFID rules violations."
An IMF report from July 2016 estimated that about €200 billion of Italian bank bonds are owned by individuals, €30 billion of which in the form of high-risk, subordinated paper.
Over a third of the loan book of Monte dei Paschi, the world's oldest still-active lender, is impaired. Its recapitalization must be concluded by year-end in order to respect a deadline for the bank to securitize €28 billion of bad loans and sell them in a deal partly underwritten by the state-backed Atlante fund. Monte dei Paschi has already managed to raise €1 billion in a debt-for-equity swap, but without the "cornerstone" investment of about €1 billion from Qatar, the only other option to keep the bank alive remains nationalization, at least in part, analysts said.
"We believe the No vote makes it more difficult for Monte Paschi to find an anchor investor – based on the size and valuation of the capital increase needed," wrote Morgan Stanley analysts.
A bailout is ready for Monte dei Paschi, should private-sector recapitalization fail, Reuters reported Dec. 6, citing confidential sources.
In a note on Dec. 5, CreditSights analysts flagged a "heightened risk of direct state intervention in recapitalizing MPS and the prospect of subordinated debt writedowns, possibly with protection or compensation for retail holders of the debt."
"If you follow the rules some of the bond investors will have to take a cut but whether that is going to happen in reality remains to be seen," said Michael Boye, from Saxo Bank's fixed-income desk in Copenhagen.
Monte dei Paschi did not respond to requests to comment.
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nel grafico allegato il ratio "x", ovvero l'ammontare del debito subordinato(outstading in miliardi di euro) su capitalizzazione di borsa.
