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Some Monte dei Paschi bondholders face wipeout as cash call fails

A state bailout of Banca Monte dei Paschi di Siena SpA could wipe out its institutional bondholders, but retail bondholders stand a good chance of getting compensation from the Italian government, according to analysts.

The bank is widely reported to be heading toward a state bailout after a failed attempt to raise €5 billion from private investors. Italy's government will increase public debt to fund a €20 billion backstop for the weaker Italian banks including Monte dei Paschi. The sum is equivalent to 1.2% of GDP. Monte dei Paschi's board is expected to approve a request for state aid when it meets later Dec. 22. The Italian government will meet that evening or early Dec. 23 to discuss the request, Reuters reported Dec. 22.

"In terms of the institutional investors, what they will be able to recover is anyone's guess, but you could envisage some of them being wiped out completely," Rahul Kalia, investment manager at Aberdeen Asset Management, said in an interview. "Our expectation is that there will be some form of compensation for retail bondholders from the Italian government if they are bailed in."

Some €4.5 billion in debt is likely to be bailed in, Kalia said. Of that subordinated debt, about €2 billion is held by retail investors and €2.5 billion by institutional investors.

Institutional bondholders are likely to take a "very severe hit," Chris Beauchamp, senior market analyst at stockbrokers IG Group, said in an interview.

However, allowing retail bondholders to lose their investments in their entirety would be a dangerous move for the Italian government, according to Beauchamp.

"Retail bondholders are a large base of investors from a broad cross-section of Italian society," he said. "The government is going to come under a lot of pressure about them, and I think it is very probable that they will get some compensation."

The Italian government has promised a "minimal" impact on savers in the bank, who are expected to be completely protected.

Signs of trouble elsewhere

Many Italian banks have struggled as Italy's economy floundered in the wake of the financial crisis and loan quality dropped. Italian authorities have sought to encourage mergers and acquisitions by legislative means with the goal of helping smaller lenders develop scale synergies and preventing them from losing access to funding. Among the largest deals lined up is a merger between Banca Popolare di Milano Scarl and Banco Popolare Società Cooperativa.

But others have had less luck. Seven Italian banks are in distress and require additional capital, bankers told London's Financial Times. Authorities are hoping that the €20 billion earmarked by the Italian state will be enough, but Goldman Sachs estimated they may need €38 billion to be adequately capitalized, the FT noted separately.

Marco Stringa and Paola Sabbione, two Deutsche Bank analysts, wrote in a note to investors Dec. 22 that, based on the experience provided by Spain's bailout of its banks, the Italian government should have set aside €32 billion rather than €20 billion.

"We would argue that a truly effective backstop should be larger than the size of the problem. A large precautionary backstop could actually decrease the ex-post cost for the Italian government," they wrote. "That said, even if the plan does not go as far as providing a comprehensive backstop to address the system-wide NPL issue, it is still a significant step forward for the weakest banks. It should reduce the risk of financial instability at least in the short-term."

Veneto Banca SpA and Banca Popolare di Vicenza SpA are, next to Monte dei Paschi, of particular concern to authorities, in part because they are among the larger of the troubled mid-cap Italian lenders. Veneto Banca reportedly received emergency liquidity assistance from European authorities in July, underlining the extent of its troubles.

Banca Carige SpA, Veneto Banca and Popolare di Vicenza could altogether require €4 billion in additional capital, the FT said, citing "people with knowledge of the matter."

Four other banks that were rescued in November 2015 — Banca Etruria, Banca Marche, CariFerrara and CariChieti — are also of concern.

Beauchamp said confirmation that the government is prepared to stand behind Monte dei Paschi could soothe market jitters surrounding these smaller players.

UniCredit — a different story altogether

The failure of Monte dei Paschi's cash call raised concerns that UniCredit SpA's forthcoming capital increase could suffer as a result, but Banca Akros analyst Luigi Tramontana told S&P Global Market Intelligence that such fears are overblown.

"There are many differences [between the two banks]," he said. "The first one is that Monte dei Paschi is worth half a billion and is asking for ten times its market cap. UniCredit is asking for a little bit less than its current market cap. There is a different scale."

He continued: "The second difference is that UniCredit presented a very credible business plan with the very rapid delivery of the disposals over the last few weeks and months, and with the delivery of approximately half the target they are giving in terms of noncore deleveraging. This is not the case with Monte dei Paschi, where the recapitalization was tied to the finalization of the NPL securitization."