October 23, 2017 / 2:18 PM / 5 months ago

Carige bondholders hunker down ahead of equity raise

LONDON, Oct 23 (IFR) - Banca Carige’s debt exchange offer cleared its final hurdle on Saturday, but the bank’s broader plan to strengthen its balance sheet could yet disintegrate if a forthcoming €500m equity raise fails to lift off.

Carige is the latest example of a distressed European lender using liability management exercise to underpin a thorny capital raise or optimise its debt. Bank of Ireland and the Greek lenders have undertaken similar exercises in recent years, with Novo Banco a more recent example.

These LMEs take different forms. BoI, for example, opted for a debt-to-equity swap, while the Portuguese lender launched a cash tender and plans to issue €400m of Tier 2 securities at a later date.

Carige plumped for a debt-to-debt swap. Bondholders on Saturday waved through a consent solicitation that will convert one Tier 1 and three Tier 2 bonds, worth a nominal €510m, into a 5% five-year senior note.

That approval followed last week’s preliminary results of the exchange offer, having launched in late September and intended to generate capital gains and reduce interest expense. The participation rate ranged from 80.46%-100% across the four securities.

The LME and equity raise, combined with asset disposals, are expected to raise around €1bn in capital. Those measures are designed to placate the European Central Bank which demanded that Carige (Caa2/B-) - one of the last weak links in the Italian banking landscape - strengthen its balance sheet before year-end.


Given the high participation rate, the LME has been deemed a success. One attraction for investors is the prospect of greater seniority in the debt stack.

Added to that, the 5% coupon on offer is juicy - it is not far off from where Banca Popolare Volksbank recently sold a €100m 10NC5 Tier 2 (BB/BB Fitch/DBRS) at 5.625%, for example, and helped soften the blow of being exchanged at a significant discount to par: 30% for the Tier 1 notes, and 70% for the Tier 2s.

On the other hand, the bondholders - which included Generali, Unipol and Intesa - arguably had little choice.

The bank left bondholders under no illusions as to their potential fate should the exercise founder, pointing out that failure could have “significant adverse effects on the bank’s overall economic, capital and financial situation”.

That reminder was lent extra force by the recent memory of two small regional lenders that were liquidated earlier in this year, their multiple attempts to raise capital having failed. As Italy’s ninth-biggest bank Carige is generally not viewed as systemic, increasing its chances it could be allowed to fail.

“These LMEs are not voluntary,” said one analyst. “Having the threat of resolution makes it easier to force people. Banks have more leverage over bondholders now.”


Bondholders are in for a long wait as the LME is not mooted to settle until December. It hinges on the equity raise, which is not expected to launch before mid-November.

While the equity raise is the last piece of the puzzle, Carige is coming to market just as the ECB set out plans toughening up its guidance on non-performing loans (NPLs).

That has shifted the spotlight back onto Italian banks despite the progress made in resolving Monte dei Paschi and the two Veneto banks earlier this year. The country still has some of the highest NPL exposures in Europe, and the proposals have met with strong opposition from the Bank of Italy.

“People will be asking what are the future provisioning needs of Carige, which is potentially not very helpful for its capital-raising prospects,” said one investor.

A Banca Carige spokesman told IFR that its strategic plan is very conservative in terms of the targets disclosed and very aggressive in terms of loan loss provisions.

“Having said that, every cash-in we would generate in the short/medium run will be devoted to increase NPEs coverage or improve asset quality,” he added.

Barclays last week joined Credit Suisse and Deutsche Bank on the lineup working on the rights issue. The banks have far more wiggle room than a typical underwriting, and can walk away under various scenarios including if investor appetite for the share issue wanes ahead of a formal launch. (Reporting by Alice Gledhill, editing by Sudip Roy, Helene Durand)

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