June 10, 2014 / 12:35 PM / 4 years ago

Monte Paschi shares fail to trade for second day

* Bank launched 5 bln euro rights issue on Monday

* Trading stalls due to technical issues linked to share sale

By Silvia Aloisi and Andrea Mandala

MILAN, June 10 (Reuters) - Shares in Monte dei Paschi , the bailed-out Italian bank raising 5 billion euros via a rights issue, did not trade for a second day on Tuesday due to a technical bottleneck that has created a big gap between bid and offer prices.

The shares also did not trade until the close on Monday, the day Italy’s third biggest bank began the capital raising designed to repay state aid and bolster its finances in preparation for a Europe-wide review of lenders.

The cash call is nearly twice the bank’s market value, which was about 2.9 billion euros ($3.95 billion) on Friday. It offers existing shareholders 214 new shares for every five held, at a price of 1 euro each.

The issue will increase the number of tradable Monte dei Paschi shares to 5.116 billion from 116 million euros.

But the new shares will not be physically available until the end of June when the capital raising process is due to complete.

Speculation in Monte Paschi shares in the run up to the rights issue, as well as other technical factors - such as fund managers’ and derivative brokers’ need to boost their holdings to take account of the share sale - has resulted in a flood of buyers seeking shares when there are relatively few sellers.

According to Reuters data, buy orders at mid-session on Tuesday were for around 17 million shares against around 2,000 shares on offer. The bid price on the shares was 2.2160 euros and the offer price was 1.48 euros by 1116 GMT.

On Monday, the shares rose by 20 percent to 1.8480 - the maximum percentage variation allowed by the Italian Bourse in a single trading session. They were only allowed to trade at the closing bell. On Tuesday, they were indicated higher at 2.2160 euros but did not trade.

Traders said Monte Paschi’s cash call is expected to be a success. They said the rise in the share price was artificial as the lack of available shares was distorting market prices.

“It’s a classic short squeeze due to the dilutive nature of the rights issue, there are way more new shares than old ones but the new shares won’t be delivered until the third week,” the head of a derivatives trading firm in London said.

“It’s an embarrassment to be honest,” he said, echoing the frustration voiced by many Milan traders who said the Italian Bourse - owned by the London Stock Exchange, should have predicted the problem and taken measures to offset it.

“It’s not clear yet how it can be resolved,” one trader said. “It’s unheard of, there is no justification even if there are technical issues, I am very surprised,” he said.

Neither the Milan Bourse nor Italian market regulator Consob could say on Tuesday when or how the issue would be resolved.

Consob, which has banned short-selling in Monte Paschi shares during the capital increase as is customary in Italy, said on Monday it was monitoring the situation.

Trading in the rights of existing investors to take part in the share sale was not disrupted. They fell 7 percent on Monday. The fell a further 1.6 percent on Tuesday to 21.15 euros for the right to buy 214 shares. A drop in the rights is not unusual in this kind of transaction as some investors opt out of the cash call.

“It’s pretty (difficult) to understand the share price move in the next few weeks and it will be totally uncorrelated to the rights price,” another trader on the specialist sales desk of a bank involved in the consortium of underwriters of the rights issue said.

The consortium is made up of 23 banks and brokers led by Swiss bank UBS.

The price of one euro for the new shares represents a 35.5 percent discount to the theoretical ex-rights share price taking into account the dilutive impact of the cash call, and a 96 percent discount to the previous closing price of around 25 euros. The rights will trade until June 20 on the Milan bourse and can be exercised until June 27. ($1 = 0.7345 Euros) (Addiitonal reporting by Paola Arosio and Valentina Za in Milan and Francesco Canepa in London. Editing by Jane Merriman)

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