Monte dei Paschi

Investors consider feasibility of state recap amid uncertain future

Tier twos trade violently as deadline for UniCredit deal draws closer

The rating agency said the bank's tier twos were at a high risk of default because of UniCredit's takeover offer

There are worrying signs in the way Banca Monte dei Paschi di Siena’s tier twos have traded after UniCredit signalled its interest in the bank.

Banca Monte dei Paschi di Siena’s tier twos are see-sawing in the secondary market, as investors try and determine the fate of the bonds following merger interest from UniCredit.

Credit investors are pleased with how banks performed in the EU stress test, though the sector lost more capital on average than it did in the previous exercise in 2018. The market was even sanguine about Banca Monte dei Paschi di Siena, which will be able to stick to its ‘fallback’ plan despite losing all its capital under the adverse scenario.

Banca Monte dei Paschi di Siena’s capital instruments are at risk of being zeroed after UniCredit announced this week that it could buy the state-owned Italian lender on extremely favourable terms. Market participants are more optimistic on Monte’s senior debt, which would rally strongly if included in a merger.

Andrea Orcel is looking to clinch a deal for Unicredit to acquire parts of stricken Italian lender Banca Monte dei Paschi di Siena (MPS) in the early part of September after revealing it was negotiating with the Italian government.

Banca Monte dei Paschi di Siena has settled a legal dispute with its former controlling shareholder, clearing a major source of uncertainty that had been dragging on its efforts to find a buyer.

Italy hit the market with a dual tranche on Tuesday, raising €4bn with a 30 year linker and €10bn with a new 10 year BTP. A sharp move in pricing on the 10 year leg meant it lost €45bn of orders, but SSA bankers on and off the deal said the trade was still a good result.

Banca Monte dei Paschi di Siena said there were some “uncertainties” around its capital strengthening plans as it slumped to a €1.7bn annual loss on Wednesday. The Italian lender has recently denied rumours that it is working on an imminent sale of subordinated debt.

Market participants expect banks will return with a flurry of senior transactions after results this week, as rising yields help to lift primary demand.