MILAN UniCredit SpA's (CRDI.MI) capital-raising plan caused more pain for investors on Monday, with sharp falls in the Italian bank's shares and the rights to buy into its cash call highlighting the difficulty some European lenders face recapitalizing.
The bank's 7.5 billion euro ($9.5 billion) rights issue is regarded as a litmus test of investor appetite for European banks, which must find 115 billion euros by June to shore up capital buffers to better withstand a euro zone debt crisis.
UniCredit shares closed down 13 percent at 2.2860 euros, compared with a rights issue price of 1.943 euros underwritten by 27 investment banks.
The bank is the first big lender to tap the market to repair its balance sheet since new capital targets were imposed by the European Banking Authority (EBA).
Its stock has lost 45 percent since it priced the cash call at a big discount last Wednesday and its market capitalization has dived to 6.7 billion euros from 12.2 billion.
The rights CRDI_r.MI, which allow holders to buy two shares at 1.943 euros apiece, began trading to fall 65.4 percent to 47 cents from the price implied by Friday's close.
Traders and analysts said this activity was a mix of investors bailing out of the shares and people selling the rights in expectation of being able to buy them back more cheaply later.
This follows the experience of Banca Popolare di Milano PMII.MI which saw the rights to buy its shares fall to almost zero when it sought to raise 800 million euros late last year.
At those values, it is cheaper for investors to buy the rights and subscribe to the cash call, than to buy the shares.
"Any bank would find it difficult to raise capital in this type of environment, but there's also a lot of exasperation about UniCredit among investors. It's their third capital increase in three years," said Frederic Teschner, banking analyst at brokerage Natixis in Paris.
"Everybody was telling them to raise capital in May, when all the other Italian banks did. Investors are now asking: what are they promising us? Italy is heading towards a recession, there is still a very high sovereign risk, and writedowns in all their divisions, even in Poland.
"If I am a fund manager, I do not necessarily have a lot of cash on my hands, so I would have to sell something to buy in UniCredit. Why would I sell some BNP Paribas shares to buy UniCredit stock, even if I get diluted? There is too much uncertainty on a 2013 horizon," he said.
To meet the new capital requirements, UniCredit must plug an 8 billion euro capital shortfall -- the biggest deficit for a single bank after Spain's Santander (SAN.MC), which said it had managed to raise 15 billion euros without tapping shareholders for extra cash.
UniCredit's rights issue was priced at a 43 percent discount to the theoretical ex-rights price, a much higher discount than that applied by peers in recent rights issues.
Chief Executive Federico Ghizzoni said in a newspaper interview on Saturday he had been "a little surprised" by the market reaction but remained confident about the capital hike.
However, frustration was palpable among some of the bank's historic foundation shareholders -- non-profit organizations controlled by local authorities which together hold 13 percent of UniCredit.
The head of the Banco di Sicilia foundation, which has a 0.3 percent stake, said at the weekend he was angry at the "huge financial damage" suffered because of the share fall and would not take part in the capital increase.
He said other foundations, which reinvest their profits in charity and social projects, shared his view and the arrival of new investors in the bank was inevitable.
Analysts say the slump in UniCredit's shares may discourage other lenders with big capital deficits, such as Commerzbank (CBKG.DE), from tapping the market.
The chief financial officer of smaller Italian lender Monte dei Paschi di Siena (BMPS.MI), which has a 3.3 billion euro shortfall, told Reuters the bank was working to meet the EBA requirements without having to resort to a capital increase. Nonetheless, the bank's shares fell 14.4 percent.
UniCredit's share offer ends on January 27 and is guaranteed by a pool of 27 lenders who will take up any portion of the offer that goes unsubscribed. The consortium of banks, headed by Mediobanca and Bank of America Merrill Lynch, risks finding itself with a big lump of unwanted UniCredit shares.
"The stock will gradually fall to the subscription price of 1.943. And the banks underwriting the issue will have no interest in keeping the shares after the capital increase is complete, so they will probably sell in early February," said Natixis analyst Teschner.
($1 = 0.7865 euros)
(Additional reporting by Michel Rose and Stefano Bernabei; Editing by Sophie Walker and Alexander Smith)