Banca Carige SpA is weighing options including tie-ups with other investment banks and a €200 million bond issue as pressure builds on it to strengthen its capital position, but analysts say time is running out for the embattled lender to find a solution.

The Italian bank has until Nov. 30 to come up with a plan detailing to the European Central Bank how it will plug a Tier 2 capital shortfall by the end of 2018. The board said Oct. 11 that it will evaluate all options for a turnaround, and will "consider identifying an investment bank to explore possible business combinations."

This marks a significant change in strategy for the bank, whose major shareholders had shot down the possibility of a merger earlier this year.

The statement came shortly after Fitch Ratings downgraded Banca Carige's long- and short-term issuer default ratings to CCC+/C from B-/B, and also put the bank's long-term rating on Rating Watch Negative, on the basis that failure is "a real possibility."

Banca Carige faces such serious challenges in strengthening its capital position that a regulator may have to intervene, the rating agency said Oct. 10.

Italian publication Milano Finanza reported Oct. 12 that Carige was also preparing for a €200 million subordinated bond guaranteed by its major shareholder, the Malacalza family, in a bid to shore up its capital ratios.

But analysts are doubtful that the bond plan can work under current market conditions. Italian bond markets were rattled after the government's controversial announcement Sept. 27 that it planned to increase its fiscal deficit to 2.4% of GDP.

The option of issuing Tier 2 bonds looks "challenging," according to an Oct. 11 note from ING.

"Banca Carige has highlighted its intention to issue Tier 2 debt to meet Pillar 2 requirements. This in the current market environment is getting more and more challenging in our view, with the political worries pushing Italian sovereign spreads and consequently bank spreads wider," the note said.

'Even more challenging'

Analysts at Rabobank were also pessimistic about a potential bond issue's chances of success in the current market.

"Time is running out for the Genoa-based lender as it has to come up with a tangible plan that will satisfy the ECB in November. Regarding the planned issuance of [Tier 2] ... [w]e agree that current market conditions make this even more challenging, if not impossible," an Oct. 12 note said.

The Italian media have speculated that Banca IFIS SpA or Unione di Banche Italiane SpA could be potential buyers for some or all of Banca Carige. But both lenders shot down rumors.

"We can confirm that any hypothesis of an aggregation with Banca Carige is absolutely without foundation," a spokesperson for UBI Banca said in an email.

A spokesperson for Banca IFIS also said that any rumors about it looking to acquire Banca Carige were untrue.

For Carlo Alberto Carnevale Maffè, senior lecturer of corporate strategy at SDA Bocconi School of Management, the admission of Banca Carige's board that it is looking for a potential merger represents a U-turn for the bank, which had been clinging to the hope of "a splendid, and almost impossible, independence."

While a merger looks "necessary," it does not address some of the fundamental issues facing the bank, including a weak balance sheet and an unstable management team.

"It may turn out to be too little, too late, since this new scenario changes a precious little about the critical conditions of Carige's balance sheet, but at least it cancels the previous agenda, based on unrealistic projects of autonomy, clearing the way to other strategic options," he said in an email.

Banca Carige has been dogged by numerous boardroom battles. Fabio Innocenzi was selected CEO after the bank's leading investor, Vittorio Malacalza, defeated rival shareholders who supported then-CEO Paolo Fiorentino's plans to push the bank toward a merger. Fiorentino was the third CEO pushed out by Malacalza since 2014.

The bank's phased-in Tier 1 capital ratio was 11.9% as of June; higher than both the 9.26% regulatory limit and the recommended 11.18% threshold.

Separately, Innocenzi received a mandate from the board to formalize the sale of a €400 million portfolio of unlikely-to-pay loans to Bain Capital Credit LP, an Oct. 12 statement said.