Monte dei Paschi jumps on bond train to meet bailout terms

MILAN (Reuters) - State-owned Monte dei Paschi BMPS.MI joined fellow Italian banks in a start-of-year bond issuance rush on Wednesday, paying an 8% coupon to sell a junior bond to fulfil commitments under its bailout agreement.

FILE PHOTO: People are seen inside a Monte dei Paschi di Siena bank in Rome, Italy August 16, 2018. REUTERS/Max Rossi

Italian lenders, including UniCredit CRDI.MI, Banco BPM BAMI.MI and UBI Banca BAMI.MI, have sold higher risk and relatively costlier debt this month, taking advantage of investors' moves to start to spend their new year budgets.

Monte dei Paschi’s Tier2 bond, a type of subordinated debt that ranks below senior debt in the repayment order, comes after Moody’s last week raised its outlook on the bank’s debt to “positive”, acknowledging its restructuring progress.

Monte dei Paschi, for years at the forefront of Italy’s banking crisis, was rescued by the state in 2017 in an 8 billion euro bailout that also hit the bank’s shareholders and junior bondholders.

Under the restructuring plan Italy agreed with the European Commission to clear the bailout, the bank had a commitment to issue 1.45 billion euros in subordinated debt to replenish its Tier2 capital following a debt-to-equity conversion carried out as part of its rescue.

Wednesday’s 400 million euro bond sale allows the bank to meet that commitment after being granted an extension by Brussels.

Monte dei Paschi sold a 750 million euro 10-year Tier2 bond in January 2018 but was then shut out of funding markets when a euro sceptic coalition came to power in Italy, rattling international investors.

Riding expectations of a monetary policy loosening, Monte dei Paschi again tapped junior bond markets in July 2019, selling a 300 million euro 10-year Tier2 bond at a steep 10.5%, almost double the 5.375% yield of the previous issue.

Since then, the Italian government comprising the 5-Star Movement and the right-wing League has been replaced by a more EU-friendly coalition made up of the 5-Star and the mainstream Democratic Party.

In December, Italy won an extension to the end of January of a deadline for the state to submit an outline of how it plans to re-privatise Monte dei Paschi by the end of 2021.

The government is also discussing with Brussels a scheme that would allow Monte dei Paschi to reduce its impaired loans without excessively eating into its capital buffers.

In an improvement cited by Moody’s in its recent move, Monte dei Paschi has managed to reduce its soured loans to 12.5% of total lending, beating a 12.9% target set by its restructuring plan for 2021.

That is still higher than the national average and the government’s plan aims at cutting it to around 5% to make it easier for the bank to find a buyer, sources have said.

Editing by Jane Merriman