December 5, 2016 / 2:56 PM / 3 years ago

Bondholders wait anxiously as BMPS fate hangs in the balance

LONDON, Dec 5 (IFR) - The fate of Banca Monte dei Paschi di Siena bondholders sits on a knife edge as bankers hammer out the feasibility of a private recapitalisation for the troubled lender, after voters rejected prime minister Renzi’s constitutional reforms on Sunday.

The syndicate of banks underwriting the 5bn capital raise were due to meet on Monday to discuss whether the result could knock the cash call, expected to start on December 7 or 8, off course. Under a pre-underwriting deal, the banks can drop the transaction due to adverse market conditions.

BMPS announced on Friday that a debt-to-equity conversion had raised over 1bn, said by an investor to fall in line with or just short of the bank’s target.

This has ratcheted up the pressure on other parts of the plan, including contributions from anchor investors.

Failure to find a private solution could potentially force the state to prop up the bank. This would in turn potentially trigger European rules forcing losses upon subordinated bondholders and may unleash a fresh round of volatility on European markets.

“The MPS resolution might be more complicated,” said Gilles Guibout, a portfolio manager at AXA Investment Managers in Paris.

“You could imagine that investors such as the Qataris might not invest in such an uncertain Italian political landscape. It raises the chance of state aid, with the part-nationalisation of MPS.”

Authorities had been hoping to avoid the bail-in of the bank’s liabilities at all costs after losses imposed on Italian retail investors caused outrage at the end of last year.

According to media reports on Friday, Italy has already discussed the terms of a state bailout with the European Commission that could be launched this week if needed.

“To achieve a lasting solution to the problems of the banks, there must, we think, be a high risk of burden sharing especially for subordinated bondholders,” Richard Thomas, a research analyst at Bank of America Merrill Lynch, wrote in a note on Monday.

Compensation could be paid in specified circumstances after last year’s objections, he added.

“However, any attempts to impose losses on retail bondholders would be received negatively by the market, we think, though the political fallout could be more limited if there is for example a technocratic government.”

HANGING IN THERE

BMPS’s bonds were lower on the day versus Friday’s levels.

Its 5% 2020 Tier 2, part of the debt-for-equity swap launched a week ago, has dropped two and a half points to a cash price bid of 58.9.

The 5.6% 2020s, also part of the exchange, were down over three points at 59.

But one of the hedge funds involved in the debt-for-equity swap who had spoken to the bank said BMPS had told him there was no change of plan just yet, and that it was not writing anything off.

“This referendum was not about the euro, nor about the future of banks in Italy,” said Sam Theodore, group managing director, financial institutions at Scope Ratings, who expects the private solution to go ahead.

“At the end of the day nobody wants this operation to fail. Critical will be the conversion of sub debt which so far seems to be on the right track. I doubt the bank will end up being nationalised; this would resuscitate old ghosts nobody in Europe wants to see resuscitated.”

Even if the government’s hand is forced, state aid not only for BMPS but also other Italian lenders in desperate need of capital - Banca Popolare di Vicenza, Veneto Banca and Banca Carige - looks easily manageable, said Erik Nielsen, group chief economist at UniCredit Research.

“The numbers are not that scary - maybe 10-15bn in all, depending on the degree (and venue) of compensation that would be provided to (financially) vulnerable holders of subordinated debt being bailed in,” he wrote in a note.

“That’s less than 1% of Italian GDP.”

Still, investors remain nervous around the smaller lenders’ subordinated debt. A 200m Vicenza Tier 2 trade has lost over two points, quoted at 45.6 according to Tradeweb, following the same pattern as a 200m Tier 2 for Veneto Banca quoted at 45.45.

Reporting by Alice Gledhill, editing by Helene Durand, Julian Baker

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