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Securitization back in the cards Monte dei Paschi to shed €29 bn of NPLs

by Marco Ferrando & Alessandro Graziani

The securitization option is back in the cards for the disposal of €29 billion of non-performing loans at Italian lender Monte dei Paschi di Siena (MPS) – maybe with US investment bank JP Morgan. This will be the strong point of the group's industrial plan under consideration at the European Commission.

According to Il Sole 24 Ore sources, this option is becoming the main focus in the last phases of the complex negotiations between the EU executive, the European Central Bank, the Italian Treasury, and the bank itself: the discussions are in their conclusive stages and according to the hopes of many of the involved parties should lead to the definitive go-ahead from Brussels by the end of April or at the start of May at the latest.

The negotiations have been hard because they are unprecedented and their framing is not easy. MPS now knows that it can access the precautionary recapitalization by the state (€6.6 billion on the €8.8 billion of the overall transaction), but to do so it first needs to demonstrate to the Commission that it will not make a recourse to public resources to cover the certain or foreseeable losses on non performing loans, for which it will be able to use only €6.3 billion of net assets and €2.2 billion of bonds in the hands of institutional investors which will be converted into capital (with a discount that will probably be higher than that initially agreed between Italy and the Directorate General for Competition).

According to the estimates of Chief Executive Marco Morelli and Chief Financial Officer Francesco Mele, €8 billion is amply sufficient to cover the losses deriving from the disposal of the NPLs, which is foreseen however after the entry of the state: from here there is the difficulty to now determine the discounts which the market will subsequently impose once it fixes the purchase price.

This was discussed for weeks, and at the end it was agreed that securitization is the method that makes it the most possible – or at least more than the selling of tranches imagined up to a few days ago – to outline the impact on the balance sheet.

And not only this: according to Il Sole sources, the bank has already decided to turn to Mediobanca – ad hoc advisor for the NPL issue – but also potentially JP Morgan, as an arranger of the operation. This is the same duo that tried to put together the market plan which ran aground in December. After months of work, they know the credit portfolio in question very well: this has contributed to the renewed contact of recent weeks between MPS and the investment bank, which already commissioned a due diligence at Fortress.

The ECB inspection and the “unlikely to pay” loans
Returning to the securitization plan, the bank, the Treasury and the authorities are discussing the €29.4 billion of non-performing loans on the balance sheet on December 31: considering the average cover of 64.8%, a potential securitization at a price of 20% would bring with it further devaluations of €4.5 billion, a “manageable” amount considering the capital available before the entrance of the state.

Certainly the ECB inspection of NPLs which closed in February remains unknown, since the results will be communicated in the summer. Nevertheless, as the portfolio was analyzed in December 2015, the bank has already mitigated the possible impacts with the €4.5 billion of devaluations in 2016. It seems decided, on the other hand, that the €15.2 billion “unlikely to pay” loans will remain in the bank. The 300 people from the Juliet platform (which Cerved won control of during the competition in December) could be tasked with managing these.