February 19, 2018 / 10:09 AM / 3 months ago

UPDATE 2-Italy's Creval launches 700 mln euro share sale to fund revival

* Plans to write down and sell 2.1 bln euros in bad debts in 2018

* Targets 5.8 pct 2020 ROE after negative returns in recent years

* Italy heads to general elections on March 4 (Adds comments)

By Valentina Za

MILAN, Feb 19 (Reuters) - Italian mid-sized bank Credito Valtellinese launched on Monday a 700 million euro ($868 million) share issue, aiming to raise eight times its market value in capital to restructure.

Under pressure, like other Italian banks, to clean up its balance sheet after a deep economic slump, Creval will use the money to shed soured debts that account for more than one-fifth of total loans.

Creval said its 2018-2020 restructuring plan, dubbed ‘Renaissance’, aimed to address concerns by Italy’s central bank that the lender may struggle to restore an adequate profitability given its high bad loans and operating costs.

The bank also says the clean-up will prepare it for a merger which it sees as “inevitable” as Italy’s fragmented banking industry strives to prop up profits.

Creval is betting on an 81 million euro profit this year after losing 665 million euros in 2016-2017. Creval said the regulator would closely monitor the plan’s progress, with a first check-up scheduled immediately after the cash call.

The offer runs until March 8, overlapping with an Italian general election on March 4, which may fail to yield a clear winner, keeping markets on edge.

Creval is offering up to 7 billion new shares at 0.1 euros each, so as to trade at 0.42 times the value of its assets once recapitalised.

“A multiple of 0.4 could be an interesting entry point on the stock as it’s projected to rise to 0.6 in 2020 provided they hit the plan’s targets,” said Pietropaolo Rinaldi, a fund manager at Anthilia Capital Partners in Milan.

“The clean-up looks final and that’s also positive, but there are big uncertainties: the offer’s sheer size and its timing, with the question mark over the vote and the recent equity sell-off. Definitely a challenge, though the bank appears confident it can do it.”

Rival Carige in December struggled to pull off a 540 million euro share issue. Shareholders took up only 66 percent of the offer and the bank filled the gap thanks to investors who took on unsold shares as part of deals to buy other assets.

Creval has similar accords in place. But London-based investment fund Algebris, bad loan specialist Credito Fondiario and Austrian auction house Dorotheum have agreed to buy only up to 55 million euros in shares left unsubscribed, together with portfolios of bad debts and the bank’s pawn business.

By 1357 GMT shares in Creval were 7 percent lower, having lost around 80 percent of their value since the bank announced the bigger-than-expected cash call in early November.

The bank said in the offer prospectus that it had suffered liquidity outflows in November after unveiling the new plan and being hit by credit rating downgrades.

Shares dropped 30 percent alone since Creval priced the cash call on Wednesday and said it would offer shareholders 631 new shares for each one already owned.

Shareholders in the bank, more than half of which are small savers, stand to lose 99 percent of their investment if they don’t buy into the cash call.

However, rights to buy into the share issue dropped 65 percent in a sign some shareholders had no plan to invest further in the bank. ($1 = 0.8065 euros) (Editing by Louise Heavens)

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