December 22, 2016 / 11:38 AM / 8 months ago

BMPS bonds plumb new depths as state aid expectations ramp up

LONDON, Dec 22 (IFR) - Some of Banca Monte dei Paschi di Siena's subordinated bonds have slumped to their lowest ever cash prices as efforts to recapitalise the lender via a private-sector solution appear to have failed.

The bank reopened a debt-for-equity swap last week, part of a final drive to scrape together 5bn of fresh capital ahead of a year-end deadline. BMPS said late on Wednesday that the swap was expected to raise a maximum of 2.07bn, leaving a gap of 3bn to fill via a share sale which closes on Thursday afternoon.

There had been no firm expressions of interest from anchor investors by Wednesday evening, increasing the chance of state aid and enforced losses for bondholders. Under European Union bailout rules, investors must bear some of the losses before taxpayer money can be used to save a bank.

Two Tier 2 bonds - 5% Apr 2020s and 5.6% Sept 2020s - have slipped to cash prices in the mid 40s, their lowest ever level. They were bid in the high 50s as recently as last week.

"We will soon know whether or not a messy bail-in process will be triggered," Gary Kirk, a founding partner at TwentyFour Asset Management, wrote in a note on Wednesday.

"This of course would pose a number of challenges for the Italian government, which could potentially impact the wider Eurozone stability further down the road."

The Italian government on Wednesday approved a 20bn plan to prop up the country's weaker banks, which is expected to be used in support of BMPS.

But imposing losses on bondholders will be a precarious balancing act for Italian authorities.

There has been strong resistance to force losses on retail investors after the resolution of four small Italian lenders caused outrage at the end of last year.

But others believe that the rule book must be strictly adhered to, particularly after the effective bail-in of almost 2bn of Portugal's Novo Banco senior bonds at the end of 2015 riled institutional investors.

BNP Paribas analysts argue that the capital structure must be followed strictly, the terms given to holdouts must be materially worse than those given to the LME participants, and the recapitalisation amount must not exceed 5bn.

"This will show that bank resolutions are a predictable process and will enable investors to price in the risk properly in the future," they wrote.

The picture is complicated further by the stance of Italian banking industry rescue fund Atlante, which will only buy bad loans off BMPS if the state takes part in the cash call for no more than 1bn, and without triggering state aid rules.

Other Italian banks' bonds are weathering the latest developments at BMPS. UniCredit, which unveiled a 13bn rights issue last Tuesday to plug a 12.2bn hole, have remained firm in secondary. A 1bn 6.75% Additional Tier 1 note, the riskiest form of bank debt, has been bid in the low 90s since rallying after last week's investor day.

Reporting by Alice Gledhill; editing by Sudip Roy

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