MPS is set to return to the capital markets less than a year after the Italian state had to save it from failure with a “precautionary recapitalisation”.
Italy’s Ministry of Economy and Finance plugged €3.9bn into the bank during the controversial bailout last summer, and subordinated debt worth €4.3bn was converted into equity.
It may therefore have looked like a risky decision for MPS to go back to subordinated bond investors this week, cap in hand, canvassing interest for another new tier two so soon after imposing losses on the old instruments.
But 80 accounts signed up to the roadshow in less than a day, suggesting that there are plenty of fund managers with memories short enough for MPS to be able to ring in the New Year with a successful return to the capital markets.
What MPS’s comeback plans really show us, though, is that the failure of Banco Popular has changed very little about the pricing dynamics on capital trades from fragile financial institutions.
Those closest to MPS’s 10 year non-call five offering suggest that the Italian issuer could end up paying a coupon of close to 5% for the benchmark-sized tier two.
This would be something like a 75bp pick up over 10 year non-call five tier twos issued by other vulnerable banks based in Southern Europe — which are trading in the low 4%. But it would offer no premium at all over deals at the riskiest end of the AT1 market, with Caixa Geral de Depósitos’ €500m perpetual non-call five year quoted as yielding about 6% this week.
There could be no clearer evidence that the market still has very different ideas about the risk of investing in tier twos compared with the risk of investing in AT1s.
And that should be surprising.
Banco Popular’s failure was supposed to have shown that there was no point in pretending that there was any difference between the two layers of capital when talking about weaker banks.
Investors in both asset classes lost everything when Popular was put into resolution last June, blurring the line between the joint notions of “going concern” and “gone concern” capital.
If you have any doubts at all about a bank’s long term viability, investors said at the time, you should expect to lose 100% of your investment no matter where you are positioned in a bank’s capital structure.
But it is difficult to imagine that market participants would be talking about a 5% coupon for an AT1 from MPS this week, when national champion UniCredit has a recent deal yielding more than that this week.
And yet, the proposed tier two deal from MPS is clearly equally as risky.
Fitch is expected to rate the bonds at CCC+, seven notches below investment grade — reflecting the fact that there will be no debt cushion at all between the prospective tier two investors and MPS's equity.
And though MPS has a turnaround plan printed on paper, nobody should be confident about the famously old bank's long-term viability until the recovery plan has started to be put into practice.
The resolution of Popular may well have been very important for market participants wanting to learn exactly how they should judge value in a fragile bank, but MPS's capital market comeback this week is likely to show that few of the lessons have been taken on board by the market.
At the start of 2018, a crude search for yield is still by far and away the most important driving force behind new issue pricing in the financial institutions bond market.