November 3, 2016 / 4:35 PM / 2 years ago

Monte dei Paschi's senior debt hit by conversion risk

* Bank looking at junior and senior debt for conversion-document

* Bonds falling on secondary market, hitting debt of weak peers

By Valentina Za and Giulio Piovaccari

MILAN, Nov 3 (Reuters) - Senior bonds issued by ailing Italian bank Monte dei Paschi di Siena came under pressure on Thursday as investors worried they may be included in a planned debt-to-equity conversion.

Monte dei Paschi emerged as the weakest lender in European Central Bank stress tests in July and it has asked shareholders to approve a share issue for up to 5 billion euros ($5.5 billion), its third capital increase in as many years.

The bank aims to raise cash through a share sale on the market, through a private placement to anchor investors that have yet to be identified, and via a voluntary debt-to-equity swap it plans to launch after a Nov. 24 shareholder meeting.

The bank said in a document prepared for the meeting and published on its website on Thursday that the swap offer could target both its subordinated and senior bonds.

The price of senior MPS bonds fell on the news, traders said, and dragged down bonds of weak regional lenders Popolare di Vicenza and Veneto Banca, which are also seen at risk of having to raise capital.

A Monte dei Paschi April 2019 bond lost 2 percentage points in price by 1501 GMT giving a yield of 5.2 percent.

An October 2018 bond by Popolare di Vicenza, which was rescued earlier this year by state-sponsored bank bailout fund Atlante, fell 3.5 percentage points in price yielding 12.4 percent.

Monte dei Paschi CEO Marco Morelli, who is currently in the United States to drum up investor support for the fundraising, said last month the bank was looking at its entire debt portfolio for the conversion.

However, CFO Francesco Mele said it would mainly target subordinated bonds as its holders would be more likely to accept a voluntary conversion offer.

UniCredit said in a research note: “We do not see any apparent advantage for (senior unsecured in particular) bondholders to swap into much riskier equity at such a weak bank.”

Two traders said the conversion take-up among senior bondholders would likely be very low, raising the prospect the bank could introduce a penalty mechanism to persuade them.

“It seems unlikely the conversion will include senior bonds. It would set a precedent and could have a systemic impact. But it’s moving the market,” a Milan-based trader said.

Monte dei Paschi is still working on the terms of the offer.

Barclays analysts estimate retail investors account for 57 percent of the bank’s senior and subordinated bonds outstanding on the market. ($1 = 0.9027 euros) (Editing by Crispian Balmer)

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