Investors reluctant to back Monte Paschi's cash call

September 13, 2016 1:53 PM EDT

A logo of Monte dei Paschi di Siena bank is seen on the ground in Siena, Italy, November 5, 2014. REUTERS/Giampiero Sposito/File Photo


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By Simon Jessop and Maiya Keidan

LONDON (Reuters) - Investors are reluctant to back Monte dei Paschi di Siena's bid to raise billions of euros, leading fund managers and a source with knowledge of the matter told Reuters, posing a huge challenge for a new CEO seeking to save the Italian bank.

The lender, which is expected to name a new chief executive on Wednesday, must raise up to 5 billion euros ($5.6 billion) as part of an emergency rescue plan to stave off the risk of being wound down and a wider banking crisis that would send shockwaves across Europe.

But its 45-billion-euro mountain of bad loans is deterring investors from backing it in its third recapitalization in as many years, according to four leading European fund managers and the investment banking source with knowledge of the matter.

Since the private sector-backed rescue blueprint was announced in late July, hundreds of investors had been sounded out about buying stock but interest has been lukewarm, said the source.

The source added this had triggered the departure of CEO Fabrizio Viola, who agreed to make way for a new boss to come in to persuade investors to back the cash call.

Gennaro Pucci, chief investment officer at London-based investor PVE Capital, said he would not buy shares because, even if a significant proportion of its bad loans were spun off into a special vehicle - as envisaged under the plan - he feared the bank could suffer further losses from remaining soured debt.

A similarly skeptical view was expressed by the other three European fund managers who told Reuters they would not be buying Monte dei Paschi equity. They declined to be named, saying their business dealings were confidential.

Monte dei Paschi declined to comment.

The 5-billion-euro cash call, which under the original plan was to be completed by year-end but now looks set to be delayed to early 2017, is a tall order for a lender that is worth just 679 million euros on the market and has burned through 8 billion euros from two previous share issues since 2014.

The bank emerged as the worst performer in European stress tests that showed its capital would be entirely wiped out in a severe economic downturn.

Its poor financial health threatens the wider Italian banking system, the savings of thousands of retail investors and the political standing of Prime Minister Matteo Renzi. A financial crisis in the euro zone's third-biggest economy would also risk creating contagion across Europe, a region already reeling from Britain's decision to leave the EU.

BONDHOLDERS

If the attempt to raise capital from investors fails, it shifts the problem back to the Italian government. But heavily-indebted Italy would struggle to help.

Under new EU rules for dealing with bank crises, any state bid to help would require penalizing the banks' bondholders - a politically sensitive issue as many ordinary Italians own such debt – before any taxpayer money can be used.

The government is also reluctant to ask for international aid, as that too would require Monte dei Paschi's existing investors to share some losses.

Monte dei Paschi's 45 billion euros of gross problematic loans represent around 40 percent of its total loans - a higher proportion than any Italian lender.

Under its rescue blueprint, it plans to transfer around 27 billion euros of its worst loans to a special vehicle which, in turn, will seek to repackage and sell them.

Even if it succeeds in getting rid of these loans, however, it would be left with billion of euros of so-called "unlikely to pay" loans, meaning it could face further losses.

A consortium of banks led by JP Morgan (NYSE: JPM) and Mediobanca has made a preliminary commitment to underwrite the bid for fresh cash.

However attempts to put the bank back on its feet have been dogged by uncertainty over the outcome of an upcoming constitutional referendum in Italy, and a competing search for fresh money from healthier Italian rival UniCredit.

The head of Bank of America Merrill Lynch in Italy, Marco Morelli, is widely expected to take over as Monte dei Paschi's chief executive.

Morelli was in Frankfurt on Tuesday to meet regulators at the European Central Bank, a source familiar with the matter said.

($1 = 0.8908 euros)

(Additional reporting by Silvia Aloisi in Milan; Editing by John O'Donnell and Pravin Char)



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