© Reuters. FILE PHOTO: People stay at Piazza Salimbeni entrance to the headquarters of Monte dei Paschi di Siena (MPS), the oldest bank in the world, which is facing massive layoffs as part of a planned corporate merger, in Siena, Italy, August 11, 2021. REUTERS/Jen
By Valentina Za
MILAN (Reuters) -Italy’s Monte dei Paschi di Siena (MPS) said a new share sale to raise up to 2.5 billion euros ($2.4 billion) would cost it 125 million euros in fees to financial institutions backstopping the issue.
MPS will launch its seventh cash call in 14 years on Monday to fund job cuts and replenish its capital reserves five years after an 8 billion euro bailout that handed the state a 64% stake in the world’s oldest bank.
In the offer’s prospectus it published late on Friday it disclosed the fees to be paid to a group of eight banks led by global coordinators Bank of America (NYSE:), Citigroup (NYSE:), Credit Suisse and Mediobanca (OTC:), plus London-based fund Algebris.
After difficult negotiations that risked derailing the capital raising, the eight banks have agreed to guarantee the share issue for up to 807 million euros.
Algebris is backstopping up to another 50 million euros.
The commitment by the lenders and Algebris to mop up unsold shares is subject to customary material adverse change (MAC) clauses, allowing guarantors to walk away in case of major negative events, MPS said.
The fees amount to nearly 15% of the guaranteed sum and compare with a market value of just 99.8 million euros for MPS on Friday.
The government, based on its stake in the bank, will cover 64% of the cash call, leaving up to 900 million euros that must be funded privately to meet European Union state aid rules.
To secure support from the banks, MPS has been forced to gain investor commitments covering at least half of the private portion of the capital increase.
The bank needs the money to meet goals set under a business plan new Chief Executive Luigi Lovaglio unveiled in June, including a 14.2% Tier 1 capital ratio in 2024.
The cost of the capital increase, which totals 132 million euros, would shave 15 basis points off that target, MPS said.
The European Central Bank (ECB) had noted that, even before factoring in the cost of the issue, the target was 150 basis points below the average for other Italian banks under direct ECB oversight, it added.
“Such a gap … could represent a possible hurdle to a merger deal with a potential partner over the long term,” MPS said.
The bank is expected to seek a merger after the capital increase to allow the state to cut its stake as agreed with the EU.
MPS said its current Tier 1 capital, while above regulatory requirements, was nearly 800 million euros short of a recommendation set by the ECB on an individual basis to ensure banks can withstand stress, known as Pillar 2 Guidance.
The ECB also considered its business model a high risk factor, it added.
“The ECB concluded that MPS will be able to generate stable and robust profitability only if, after the capital increase, its management will manage to meet the plan’s targets proving over time … that structural weaknesses have been overcome,” it said.
($1 = 1.0263 euros)