Everything That Hasn’t Gone Wrong For Adorable Italian Bank Still Could

Monte dei Paschi does not literally translate as "Mountain of Debt"... Yet.
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By Vyacheslav Argenberg (http://www.flickr.com/photos/argenberg/312122277/) [CC BY 2.0], via Wikimedia Commons

By Vyacheslav Argenberg (http://www.flickr.com/photos/argenberg/312122277/) [CC BY 2.0], via Wikimedia Commons

Banca Monte dei Paschi di Siena is the oldest bank in the world—and arguably its prettiest—so in a sense it’s fitting that it feels like we’ve been waiting for it to die for an eternity. In fact, it’s only been four years since we learned that they were sweeping an abbondanza of red ink under the secretive derivative carpet. Since then, an apparently endless series of recapitalizations, restructurings and bailouts have kept the bank on life support. The latest such intervention is a €4.3 billion debt-to-equity swap, part of yet another recapitalization that only needs to get done by the end of the year.

This being Monte dei Paschi, however, things are never so simple as a quick debt swap saving the day. Indeed, should you have the misfortune of holding some of MdP’s subordinated bonds, the bank’s got 146 pages of reasons why you might want to hold onto them.

Monte dei Paschi warned on Monday of "considerable uncertainty" surrounding the whole plan.

Allow them to elaborate: In addition to the standard-issue stuff like the yawning chasm of bad loans that MdP might still have to write down and the lack of liquidity that the rescue plan is intended to solve, neither of which will become clear until after the swap and rescue plan are (hopefully) completed, and the prospect of yet another stress-test failure, there are some other fun nuggets.

• There are the lawsuits seeking 12 times what bank’s worth, for which it has set aside 95% of its market cap to deal with;
• There is the fact that the shares it wants to give you have lost 86% of their value this year;
• There are the massive deposit outflows;
• Oh yea, and there’s the increasing likelihood that Italy will join the U.K. and U.S. in self-destructive electoral purgatory come next month’s constitutional referendum.

In sum,

“In light of the considerable uncertainty surrounding completion of the different parts of the overall deal, there is a risk that the deal itself may not succeed and cannot be concluded.”

On the other hand, if you do hold onto those bonds…

The risk of a bail-in - or resolution of the bank under European rules that impose losses on its bondholders - is mentioned 30 times by the Tuscan lender, which fared the worst in European stress tests of banks in July.

Italy’s Monte dei Paschi warns of myriad threats to rescue plan [Reuters]
Banca Monte Dei Paschi Launches Debt-to-Equity Swap [WSJ]