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After €8.8 bn capital increase, MPS to be 66% owned by the State

by Luca Davi

After a €8.8 billion capital increase and public bailout, Italian bank Monte dei Paschi di Siena will be 66%-owned by the State, with another 25% owned by holders of subordinated bonds.

This is the likely final shareholder structure of the Tuscan lender, according to calculations by Equita Sim, based on the changes introduced with the decree-law definitely approved yesterday by Parliament.

The new decree brings some substantial changes to the proposal approved at the end of December. Overall, according to the report by analyst Giovanni Razzoli, the terms of the state bailout are “less favorable” to institutional and retail bondholders, although the general structure of the intervention “overall remains investor-friendly. ”

Let's see in detail what changes will closely affect investors. The first concerns the value of the bonds which will be used to calculate the equity conversion price. This will not be based on the book value of the security but by the subscription price of the bond. Essentially, the price of the shares issued through the mandatory bond swap cannot be higher than the price initially paid by the investor.

The legislative measure prevents any speculative moves by funds or investors who subscribed the bonds at a discounted price in the run-up to the capital increase hoping for a full repayment later. As for burden sharing, the provision introduces a limit on the conversion price.

The decree confirmed the 15% discount to the shares offered to holders of subordinated bonds participating in the swap, while the State will buy new shares through the public recapitalization at a 25% discount compared to the conversion price.

Another important detail concerns the mechanism to reimburse the shares coming from the swap of the subordinated bonds in senior bonds, which only applies to the securities bought before January 1, 2016, when the bail-in regulation entered into force.

As for the issuance of shares through the bond swap and the public shares sale, according to Equita, the price should be of around €20.65 per share, with a discount of 15-25%.
“Based on our calculations, the holders of subordinated bonds would have around 25% of MPS and the government would control 66%,” broadly in line with the indications provided by MPS Chairman Alessandro Falciai.

Meanwhile, the bank today will release its 2016 financial results, which will likely record additional write-downs, after the €848 million loss reported in the first nine months of the year.

At the end of the month, the bank will start negotiations with European authorities on the new industrial plan, which should find a definitive solution to the €27 billion worth of NPLs in the bank's balance sheet. The plan should be approved by the board during the meeting scheduled for February 23.

The Economy Ministry will then send a new plan to the Directorate-General for EU Competition for the final approval.