LONDON, Dec 23 (IFR) - Banca Monte dei Paschi bonds barely
moved on Friday morning after the bank confirmed that its
efforts to fill a 5bn capital hole via a private-sector
solution had failed.
Within minutes of a late-night Cabinet meeting ending, the
country's third largest lender issued a statement saying it
would formally request state aid, opening the way for possibly
the biggest Italian bank nationalisation in decades.
Some of the bank's subordinated debt had plummeted to record
lows in recent days as hopes around the recap plan faded. Under
European Union state aid rules, banks with a capital shortfall
have to bail-in equity and subordinated debt before resorting to
Two Tier 2 bonds - 5% Apr 2020s and 5.6% Sept 2020s - had
slipped to cash prices in the mid 40s, where they were bid on
Friday morning. A 3.625% senior bond due April 2019 was also
unmoved at a yield of around 5.5%, having jumped to 6.5% earlier
this month. Senior bondholders are not subject to bail in.
Though full details of the rescue plan have yet to emerge,
the government said in a statement that the bank's Tier 1 bonds
will be exchanged into shares at 75% of their nominal value and
Tier 2 bonds, held mostly be retail, at par.
To further insulate retail investors from losses, Monte dei
Paschi will offer to swap the shares they end up with as a
result of the forced conversion with regular, or senior, bonds
and sell the same shares to the state instead, Reuters reported.
"The terms of the conversion are disappointing," said BNP
"Tier 1s will get a high recovery of 75c, which will dilute
higher parts of the capital structure. There is no
differentiation between voluntary participants in the liability
management and holdouts, which sends the wrong signal for future
interventions," they added.
"There will be little incentive for holders of subordinated
debt to participate in future distressed exchanges, which will
make the need public support more likely."
As a result of the recapitalisation, credit default swaps
referencing subordinated debt are expected to trigger under a
government intervention clause that was included in new 2014
Five-year subordinated protection under the new definitions
was trading at 50%/55% upfront on Friday, indicating high
likelihood of a payout.
"The market seems convinced that this is a government
intervention credit event and we highly doubt that there will be
any 2014 subordinated contracts outstanding in a month's time,"
said an investor at one European credit hedge fund.
Subordinated CDS contracts trading under old 2003
definitions, which do not include government intervention as a
credit event, were seen at just 10%/15% upfront, suggesting that
they will not pay out.
With senior debt unlikely to be touched by the
recapitalisation plan, CDS was 380bp/420bp.
Market participants expect a question regarding a BMPS
credit event to be submitted to ISDA's Credit Determinations
Committee in the coming days. The panel of 10 buyside and five
sellside members will then meet to determine whether the
recapitalisation constitutes a credit event that would trigger
an auction to determine payouts on CDS contracts.
More than US$9bn gross notional of CDS is outstanding on the
issuer, according to data from the Depository Trust and Clearing
Corporation. When netted down, that equates to just US$238m
across senior and subordinated contracts combined.
(Reporting by Alice Gledhill and Helen Bartholomew; Editing by