BMPS DEBT TENDER WINS OVER HEDGE FUNDS BUT STILL FACES RISKS
Hedge funds investors holding some ofBanca Monte dei Paschi di Siena's riskiest bonds said they wouldtake part in the bank's proposed tender but the trade is stillriddled with execution risk with Tier 2 holders' participationin the balance.
The Italian lender announced late on Monday that it waslooking to target up to €5.3bn of subordinated debt in adebt-for-equity swap aimed at getting the bank back on its feet(Full Story).
The liability management has become a key plank of thebank's recapitalisation efforts and BMPS has left little tochance by proposing what hedge funds and real money investorsdeemed as attractive terms.
'The offer on the Tier 1 is very good,' said a hedge fundinvestor that is part of a bondholder group holding some of thebank Tier 1, so-called FRESH and some of the Tier 2 debt.
'There was a concern that we would get squeezed to 70/75 butat 85, we are happy to contribute to the capital raise with ourbonds. We like the valuation of the bank that is being created.'
BMPS intends to split the cash tender offer in two groups ofsubordinated debt. In the Tier 1 part, investors will be offered85% of par on three bonds and 20% of par on preferred sharesecurities called FRESH.
Investors will be offered 100% in the Tier 2 part of theliability management, which includes a €2.06bn Upper Tier 2bond.
The premia offered on the Tier 1 and Tier 2 debt rangebetween 22.7% and 42.3% above where most of the bonds had beentrading in the last month, a chunky premium for a bond tender ina challenged bank.
'I think [people] will [convert] because ultimately it'squite important it gets done,' another hedge fund said.
'The Lower Tier 2s were trading in the low mid-70syesterday, so basically a 32% premium and the Tier 1, thepremium is 30-40%.'
POKER GAME
But while most market participants agreed that the proposedcash tender terms looked generous for the Tier 1, there werequestion marks on the Tier 2.
'The offer is very generous to the Tier 1 holders: 85 onsomething that doesn't pay coupons, is very illiquid and wastrading in the 50s two weeks ago is as good as it possibly gets,and I think it will have a high acceptance rate', a seniorcredit analyst at a fund manager said.
'However, it will be interesting to see how the Tier 2responds and is more difficult to forecast. They might hold outin the hope that will get more but it's like a game of poker andthe next step is a mandatory tender.'
BMPS was clear in its proposal, saying that without asuccessful tender, it would be unable to conclude its capitalincrease, which would in turn prevent it from deconsolidatingits non-performing loan portfolio.
Failure to do so could subject BMPS to the Bank Recovery andResolution Directive and therefore potential bondholderhaircuts.
'Risk remains that not enough fresh equity capital turns upand subordinated bonds get bailed in as part of anationalisation,' said Dierk Brandenburg, senior credit analystat Fidelity.
'This is a big stick the bank has against bond investors.'
His view was shared by the first hedge fund investor. 'Thereis a view from certain Lower Tier 2 holders who think that evenin a resolution, they would get par,' he said. 'But you have toremember that the bank would be valued in a completely differentway if it was to be resolved and there is a risk they could endwith a far worse treatment.'
BONDS TO THE RESCUE
Market participants agreed that the transaction had beenstructured in such a way as to get as much equity as possible,similar to some of the Greek banks liability managementexercises conducted at the end of 2015.
'Bondholders are captive and are taking the place of equityinvestors that would otherwise demand a much higher discount,'Brandenburg said.
And unlike the Irish banks where bondholders were forced toswallow deep haircuts on their debt that allowed theinstitutions to book a capital gain, BMPS has differentchallenges to address.
'This was a difficult point in history,' said the seniorcredit analyst. 'Here, it's not yet a systemic banking crisis,it's a single institution. They need to entice people into thetrade as it's a very important leg of their plan.'