MILAN/ROME (Reuters) - Bailed-out Italian bank Monte dei Paschi di Siena (BMPS.MI) has warned its 5 billion euro ($6.9 billion euros) share issue may not be enough to bolster its balance sheet if EU regulators force it to set aside more cash to cover for bad loans.
In a 515-page prospectus for the cash call, due to start on Monday, Italy's third-largest bank said it could need further capital-strengthening measures after the European Central Bank (ECB) and the European Banking Authority (EBA) complete their review of lenders across the euro zone.
The bank has already increased the size of the share issue to 5 billion euros from the 3 billion previously planned, to plug any hole the European watchdogs may find in its finances, but that may still not be enough.
The lender said late on Thursday it would offer 214 new shares for every five held, at a price of 1 euro each, implying a 35.5 percent discount to the theoretical ex-rights share price (TERP), which takes account of the dilutive effect of the new shares, and a 96 percent discount to the previous closing market price. [ID:nL6N0OM5U2] Traders and analysts said the steep discount was meant to protect the issue's underwriters from the risk of a large amount of unsold shares, given the sheer size of the issue, which is nearly double the bank's stock market value.
The consortium of underwriters - made up of 23 banks led by UBS UBSN.VX - reads like a Who's Who of international finance and the transaction will cost Monte dei Paschi a hefty 260 million euros.
The share sale, implying a TERP of 1.55 euros, is so dilutive for existing shareholders that if they do not subscribe, their holdings would lose 97.7 percent of their value, the prospectus said.
The stock fell less than expected on Friday, trading down 1.4 percent at 24.8 euros by 1337 GMT, having briefly been suspended for excessive volatility.
"I would have expected it to fall more, given how big the rights issue is. But the discount was kind of expected," said a Milan trader.
Roberto Lottici, a fund manager at Ifigest, said the limited fall showed there was already some investor interest in the share sale.
"It seems that people do not want to miss the train of the cash call," he said. "I'd expect foreign funds to buy, betting on Monte dei Paschi's own recovery and also on Italy's wider economic pickup."
Market regulator Consob said it would closely monitor share price fluctuations during the cash call. As its customary for capital increases in Italy, short-selling of shares will be banned for the duration of the fundraising.
The Tuscan lender, Italy's third-largest by number of branches after Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) and which says it is the world's oldest bank, is one of nine Italian banks to raise new equity on the market in preparation for the EU regulatory health checks.
In total, plans raise some 10.8 billion euros have been announced by the sector.
Monte dei Paschi, which has the highest percentage of soured loans among Italy's top banks, was hit hard by the euro-zone debt crisis and by a scandal over loss-making derivative trades. It had to request 4.1 billion euros in state aid last year, which will be partly repaid by proceeds of the cash call.
The bank's financial woes have also led to a major overhaul of its shareholder structure. The Monte dei Paschi foundation, which until this year owned around a third of the bank, had to cut its stake to 2.5 percent to pay back its own debts.
The lender's main investors now include BlackRock (BLK.N) and Latin American investors Fintech and BTG Pactual.
So far only shareholders representing 14.5 percent of the bank's capital have publicly committed to taking up their rights. However, Fintech and BTG Pactual are ready to increase their respective holdings in the bank by taking on part of any unsold shares in the rights issue, the prospectus said.
Additional reporting by Stephen Jewkes; Editing by Greg Mahlich and David Holmes