Italy’s third largest bank has been racing this week to formulate and announce a plan to sell €10bn of non-performing loans, and line up banks to inject €5bn of capital, before the European Banking Authority releases its stress tests results on Friday evening, which MPS is widely expected to fail.
On Friday, when it declares its second quarter earnings, the bank is expected to announce a plan to sell €10bn of non-performing loans (NPLs) into a securitization vehicle, which will be partially supported by a new Atlante fund backed by private capital. As the sale of the loans is likely to be below their book value, the bank is then expected to launch a capital increase of up to €5bn, to be led by JP Morgan and Mediobanca and underwritten by an as yet undetermined consortium of banks.
If private demand is insufficient to back the capital raise that follows the NPL sale, under the European Union’s Bank Recovery and Resolution Directive (BRRD), MPS bondholders would be forced to take losses before public money can be spent propping up the bank.
But with 65% of MPS’s €5bn outstanding subordinated debt in the pockets of Italian retail investors, according to European economic think tank Bruegel, the failure of a market solution would be politically disastrous to the Italian government, which faces a crucial constitutional referendum in October.
Speaking in the Italian parliament on Wednesday, Italian finance minister Pier Carlo Padoan was confident that “effective and sustainable market solutions” could be found to solve Italy’s NPL problem. But he added that the EU’s bail-in rules contained “elements of flexibility” that he said “have to be exploited to the full”.
‘Optimistic spin’
However, market players have expressed scepticism over the extent of market demand that exists for the plan, despite leaks of long lists of potential banks that have been approached to participate.
“Optimistic spin is a very mild way of describing everything that comes out of MPS's treasury,” said one investor.
Whether or not there is sufficient private interest to support the deal, without having to resort to state involvement, was “the million dollar question”, said a managing director at one European NPL servicer.
“Good luck to them,” he said. “[MPS] is indicating via the media that it’s going to be able to ram them through. But it will come back to the German question, and how lenient they will be in terms of relaxing those [state aid] rules.”
MPS did not respond for comment in time for publication.
A possible compromise between the European Commission and the Italian government might allow the compensation of retail investors who lose money on bailed-in bonds. This happened last year when junior bondholders were bailed in during the rescue of Banca Etruria, Banca Marche, CariFerrara and CariChieti.
‘Not sexy enough’
A new Atlante fund will be established to focus specifically on buying Italian NPLs, according to a leaked document obtained by Italian newspaper Il Sole. The fund would play a big part in the purchase of the MPS NPL portfolio, and according to the document would be able to buy loans at a discount of between 31% and 32% of gross value.
The new fund follows previous government supported initiatives — the government guarantee for senior tranches of NPL securitizations (GACs) and the first Atlante fund, which targeted a 6% return for investors but focused its firepower on €2.5bn of capital raises for Populare di Vicenza and Veneto Banca, rather than buying NPLs.
Both initiatives have failed to set the NPL market alight, leading to heavy scepticism about the ability of government efforts to resolve Italy’s NPL problem.
“The way the scheme has been built is not sexy enough for your typical NPL investor,” said one Italian ABS trader. “The overall return of the fund is not that attractive, given the collateral. Private equity firms will not be that interested.”
“They’re relying on an investor base that is not looking at risk return profile… it’s more of a charity situation,” he added.
Frustration at the glacial pace of change in the Italian banking sector is palpable among many bankers. The co-head of DCM at one European bank said he hoped MPS could be saved, but did not rule out the benefits of more drastic reforms to move the market forward.
“In the US they got on with it [after the financial crisis] — they merged banks, they closed banks. In Europe, maybe we haven’t done enough yet,” he said. “Let’s get on with it and then we can rebuild. I’m looking forward to that."