Monte dei Paschi's shares, bonds hit by worries on emergency plan

MILAN (Reuters) - Fears over the feasibility of Banca Monte dei Paschi di Siena's BMPS.MI rescue plan hit its share and bond prices on Tuesday, highlighting the challenges faced by Chief Executive Marco Morelli on his first day in the job as head of Italy's third-largest bank.

A man walks in front of the Monte dei Paschi bank in Siena, central Italy, January 29, 2016. REUTERS/Max Rossi

Political instability ahead of a referendum vote on constitutional reforms and a banking system weakened by a deep recession have put Italy back at the forefront of market concerns over the euro zone.

Shares in Monte dei Paschi, which plans to raise 5 billion euros (4.31 billion pounds) in new equity capital while selling 28 billion euros (24.15 billion pounds) worth of bad loans at a deep discount, were down 5.5 percent at 0.189 euros by 1444 GMT.

The share price has fallen nearly 25 percent since the unexpected resignation of CEO Fabrizio Viola on Sept. 8 added to uncertainty over the lender’s future. The stock is down 85 percent so far this year.

“Investors are increasingly aware that the plan carries significant execution risks,” Fidentiis Equities analyst Fabrizio Bernardi said.

Morelli, the former head of Bank of America Merrill Lynch in Italy, met with trade unions after taking office on Tuesday.

Monte dei Paschi needs more capital after European industry-wide stress tests in July found it to be the weakest bank in Europe. But with investors wary of backing its third recapitalisation in as many years, the privately-backed rescue plan is seen as having only a slim chance of success.

“Concerns have centred on whether such a large capital increase for a bank with market value of 586 million euros is even possible,” Bank of America Merrill Lynch (BAML) analysts said in a note downgrading the bank’s subordinated bonds to “underweight.”

The yield on Monte dei Paschi's Sept. 2020 subordinated bond XS0540544912=R rose by 2.2 percentage points on Tuesday to 18.9 percent, its highest since January.

To avoid hitting investors and denting their confidence in Italian banks generally, which together hold 360 billion euros of problematic loans, the Rome government has pushed for a fully private solution for Monte dei Paschi’s problems.

Due to new European Union rules, public support would require first inflicting losses on holders of the bank’s shares and bonds.

But to cut the amount of capital to be raised on the market, Monte dei Paschi is considering converting some subordinated debt into equity, sources have told Reuters.

“We are now anticipating liability management of sub, with some risk it could be coercive,” BAML said.

Additional reporting by Danilo Masoni; Editing by Greg Mahlich