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Monte dei Paschi wins debt-for-equity approval

Monte dei Paschi di Siena has gained stock market approval to extend a voluntary debt-for-equity swap to retail investors, a key part of the Italian bank’s attempt to raise €5bn in fresh capital before Christmas and stave off a state rescue.

The last-gasp attempt by the world’s oldest surviving lender comes as regulators and the bank have revealed that long running crisis at MPS is taking a toll on its liquidity.

In a regulatory filing ahead of the swap, MPS said the European Central Bank had refused a request by the bank to extend the period for its capital plan until January because the bank’s liquidity position had “progressively deteriorated”.

Uncertainty over the fate of MPS, which faces a “bail-in” to make some investors bear part of the rescue cost if it cannot raise money from private investors, has added to a toxic political environment in Italy since the resignation of Matteo Renzi as prime minister this month after the decisive loss of a referendum on constitutional reform. The bank is the country’s third-largest by assets.

Under its plan to raise private capital, MPS said it had until the afternoon of December 21 to try to convince institutional and retail investors to convert up to €4.5bn in junior, or subordinated, debt into equity.

Should the private capital plan fail to raise €5bn, Italy plans a so-called “precautionary recapitalisation of the bank”, a state-backed solution that would involve the politically sensitive issue of forcing smaller investors to share some of the burden of the rescue.

“Forcing losses on to retail investors is going to be deeply unpopular and heighten the malcontent that many Italians feel about the status quo and that cost the government the referendum,” said Rahul Kalia, fixed-income analyst at Aberdeen Asset Management.

In an attempt to limit the fallout of any burden sharing, Italy’s new government, headed by former foreign minister Paolo Gentiloni, is seeking to iron out details of a compensation plan for as many as 40,000 retail bondholders, officials say.

Still, bankers fear a rescue of MPS could have spillover on other vulnerable bank, with a potential run on deposits and much less investor interest in possible capital hikes at several midsized lenders. Analysts say it will also have an impact on the price at which UniCredit, Italy’s largest bank by assets, can sell €13bn in new equity early in 2017.

Against this backdrop, Italy is considering the launch of a more substantial state backstop fund with €10bn to €15bn available to plug capital gaps at MPS and other vulnerable midsized lenders which need additional capital, including Popolare di Vicenza, Veneto Banca and Carige, say people informed of the discussions.

In comments that reflect a widespread view among Italy’s financial establishment, Alessandro Profumo, former chief executive of UniCredit and ex-chairman of MPS, argued on Friday in favour of a wider state-funded bailout of Italian lenders.

Using €15bn to bail out Italy’s most vulnerable banks, from MPS to the Veneto banks, “was a very limited sum, especially when compared with the amount other countries had put into their banks,” Mr Profumo told reporters.

Via FT