Monte dei Paschi

Banca Monte dei Paschi’s shares climbed 11% on Wednesday, on growing hopes that a way will be found for the Italian state to strengthen its balance sheet, enabling it to achieve a €5bn capital raising demanded by the European Central Bank and avoid a bail-in.

The junior debt of Banca Monte dei Paschi di Siena rallied strongly on Wednesday on reports the Italian government was preparing to buy €2bn of subordinated bonds from retail investors, support which could potentially avoid the European Commission’s onerous state aid rules.

Banca Monte dei Paschi’s shares leapt 7% on Wednesday morning, on growing hopes that a way will be found for the Italian state to strengthen its balance sheet, enabling it to achieve a €5bn capital raising demanded by the European Central Bank and avoid a bail-in.

The subordinated debt of embattled Italian lender Banca Monte dei Paschi di Siena (MPS) fell several points on Tuesday as the rest of the FIG market rallied.

Banca Monte dei Paschi di Siena and the underwriters of its €5bn capital raising have agreed with the prospective cornerstone investors in the deal to push back the launch of the sale by three or four days, after the resignation of Italy’s prime minister Matteo Renzi on Sunday night.

Covered bond spreads of Banca Monte dei Paschi di Siena widened further on Monday on modest volumes after Sunday’s Italian constitutional referendum and the resignation of prime-minister, Matteo Renzi.

The 'no' vote in Italy’s referendum on constitutional reform was met on Monday morning with a muted reaction in credit and equity markets but, with profound uncertainty overhanging the political situation and Banca Monte dei Paschi di Siena’s rescue plan, analysts are not optimistic about the performance of the Italian financial sector in the short term.

Market participants are nervously awaiting the results of Banca Monte dei Paschi di Siena’s debt-for-equity swap, which could derail the Italian lender’s ambitious rescue plan — notwithstanding any potential volatility following the country’s referendum on Sunday.

Bondholders will be able to take part in Banca Monte dei Paschi di Siena’s debt-for-equity swap this week, as market participants hope the Italian lender can pull off its ambitious rescue plan in what is set to be a key month for the Italian banking sector.

Banca Monte dei Paschi di Siena’s debt-for-equity swap is the bank resolution and recovery directive (BRRD) working in practice. Bondholders have no escape.

Banca Monte dei Paschi di Siena (MPS) was unmistakably clear when spelling out the terms of a debt-for-equity swap this week: if bondholders don’t volunteer to be bailed in, the bank will be placed in resolution and they will have no choice. But creditors are not the only ones who are worried as the world’s oldest lender teeters on the brink — the whole Italian banking system is holding its breath.

Banca Monte dei Paschi di Siena laid out the terms of an offer to retail bondholders to swap their subordinated debt for equity this week. High participation in the liability management exercise is essential if the bank is to complete a planned €5bn capital increase and avoid being placed in resolution.