Banca Monte dei Paschi di Siena’s Capital Increase Approval Is Credit Positive
Last Wednesday, Banca Monte dei Paschi di Siena S.p.A.’s (Banca MPS, B1 review for downgrade, E/caa2
no outlook7
) board of directors approved the capital plan that the bank was required to prepare following a
€2.1 billion shortfall revealed in the European Central Bank’s (ECB) comprehensive assessment. The plan
includes a capital increase of up to €2.5 billion. In addition, Banca MPS has secured a pre-underwriting
agreement for the entire amount from a pool of several investment banks.
The capital increase and the pre-underwriting agreement are credit positive for junior and senior
bondholders, because they significantly reduce the risk of bondholders facing a bail-in, conversion into
equity or potential losses if Banca MPS were unable to address the shortfall in the next nine months.
Banca MPS’ capital plan, which is still subject to the ECB’s approval in the coming weeks, includes a
capital increase of up to €2.5 billion, which is subject to the approval of the bank’s shareholders by 2015
and sales of non-core assets and financial assets with high capital absorption for around €220 million. The
bank will also request that the ECB reduce the capital shortfall by €390 million, considering the difference
between the ECB’s 2014 expected pre-provision profit assumption in the stress test and the bank’s
owns projections.
The final amount of the capital increase may be lower than €2.5 billion, depending on if the ECB grants
the bank its request to reduce the shortfall by €390 million and if the bank is successful in selling non-core
assets before the approval of the capital increase. Any rights not exercised will be exercised by the group of
investment banks that signed the pre-underwriting agreement (details of the agreement have not been
disclosed). The investment banks are UBS AG (A2 negative, C-/baa2 stable), Citigroup Inc. (Baa2 stable),
The Goldman Sachs Group, Inc. (Baa1 stable), Mediobanca (unrated), Barclays Plc (A3 negative), Bank of
America Corporation (Baa2 stable), Commerzbank AG (Baa1 negative, D+/ba1 stable), Deutsche Bank AG
(A3 negative, D+/baa3 stable), and Societe Generale (A2 negative, C-/baa2 stable).
The €2.1 billion shortfall includes the repayment of €750 million of government hybrid securities that the
bank had planned to repay in 2015-16, the stress test time frame. Banca MPS will use the additional €400
million it plans to raise to repay the €321 million that it had planned to repay by 2017. We expect that
Banca MPS will repay the entire €1.1 billion outstanding government bond by 2015.
This capital raise will be Banca MPS’ fourth since 2008, when it raised €5 billion to fund the acquisition of
Banca Antonveneta. Since then, it raised €2.5 billion in 2011 ahead of the European Banking Authority’s
2011 capital exercise, which still found that the bank needed €3.3 billion of additional capital. In 2014, the
bank raised €5 billion, of which €3 billion went to partially repay a government hybrid bond, €500 million
to pay interests accrued in 2013 on the government hybrid and €1.5 billion to prepare for the ECB’s
comprehensive assessment, which still determined the bank needed another €2.1 billion of capital.