The European Central Bank rejected Banca Monte dei Paschi di Siena SpA’s request for more time to ready a 5 billion-euro ($5.4 billion) capital increase, boosting the likelihood of a state bailout that would impose losses on shareholders and bondholders, according to people briefed on the matter.
Monte Paschi’s board had asked the ECB to extend the deadline from the end of the year to Jan. 20 “due to the changed reference context,” according to a statement on Wednesday. A delay would allow the bank more time to find investors as Italian leaders put a new government in place following the resignation of Prime Minister Matteo Renzi.
The ECB told Monte Paschi to prepare a plan to improve its capital by the end of this year after the bank emerged as the most vulnerable lender in a European stress test in July. Chief Executive Officer Marco Morelli put together a three-part blueprint to swap debt for equity, raise capital through a share sale and dispose of 28 billion euros of soured loans. While bondholders have agreed to exchange more than 1 billion euros of subordinated notes for shares, the exchange won’t take place if the rest of the capital plan doesn’t proceed.
The lender’s shares dropped as much as 7.3 percent. The stock has plunged 84 percent this year. Monte Paschi’s 369 million euros of junior notes due April 2020 fell more than nine cents on the euro to 51 cents, a record low, according to data compiled by Bloomberg.
“Burden sharing with state aid is now likely,” said Anne-Sophie Chouillou, a fund manager at at Anthilia Capital Partners in Italy, which owns the bank’s senior bonds. “Subordinated date will be converted. I find it difficult to see an alternative. The time left is very short.”
A person familiar with the decision said the reason behind it was that supervisors were wary that market conditions may deteriorate, instead of improving in the meantime. Another person said the regulator was concerned that the bank’s liquidity situation would worsen if it waited to raise capital.
One official said it was the Single Supervisory Mechanism and not the Governing Council of the ECB that made the decision. The ECB’s Supervisory Board prepares draft decisions, which are adopted by the Governing Council under a non-objection procedure. That means if the Governing Council doesn’t object in a defined period of time, usually five days, the decision is adopted.
A spokeswoman for the ECB declined to comment. A spokesman for Monte Paschi said the bank hasn’t received any communication from the ECB. Reuters reported the decision earlier Friday.
Morelli and Monte Paschi Chairman Alessandro Falciai are holding talks at the Italian Treasury in Rome, said a government official who asked not to be identified because talks are confidential. Finance Minister Pier Carlo Padoan and representatives of Paschi’s advisers JPMorgan Chase & Co. and Mediobanca SpA, are also attending the talks, a government official said.
The failure of the recapitalization would be a blow to Italy’s sputtering efforts to revive a banking industry that’s burdened with about 360 billion euros in troubled loans, dragging down the economy by limiting lending. Five of the six worst-performing stocks this year on Italy’s benchmark FTSE MIB Index are banks.
Under European banking rules put in place in January, governments can only bail out lenders with taxpayer money if they also impose losses on stakeholders. That includes holders of senior bonds, a class of security that was largely unscathed during the financial crisis, which may be converted into equity if a bank’s core capital levels fall.
A state rescue may not take the form of a full-fledged bail-in that would hurt the bank’s many small-scale bondholders the most. Last week Monte Paschi Chief Financial Officer Francesco Mele told investors that “precautionary” state aid was a probable Plan B should private investors balk. Even though that would avoid a full wind-down of the bank by European regulators known as a resolution, it would still force losses on creditors under so called burden-sharing.