The biggest on Wall Street.
Bank bailouts are a big profitable business. And the collapsing Italian
bank Monte dei Paschi di Siena – whose stock is nearly worthless (€0.25), and
which was “rescued” twice by investors since 2014, and which now must get
an even larger “rescue” or else – has turned into fee nirvana for investment
banks, particularly JP Morgan.
Monte dei Paschi was the worst performer in the EBA’s
stress test. Under the adverse scenario, its Tier 1 capital ratio plunged
into the negative (-2.4%), meaning that its capital would be more than wiped
out.
Now there’s another rescue deal in the works, this one far larger than the
prior two that have failed so elegantly to solve the bank’s problems. It
involves a consortium of banks, led by JP Morgan, according to CEO Jamie Dimon, and
in a secondary role, by Italian investment bank Mediobanca. Monte dei Paschi
seeks to raise €5 billion in new capital and sell €9.2 billion in bad loans
at a deep discount to get them off its books. And the underwriting fees are
going to be extraordinarily juicy.
“Three sources involved in the deal” told Reuters that the banks would extract €250 million in
underwriting fees from the equity portion of the deal (raising €5
billion).
And there’s more. The deal would also set up a special purpose vehicle
(SPV) that would purchase Monte dei Paschi’s bad loans. Funding the SPV would
require a €6-billion syndicated bridge loan. JP Morgan is trying to arrange
that bridge loan, for which the investment banks could be paid up to €300
million in fees.
Participants in the bridge loan would be stuck with Monte dei
Paschi’s nonperforming loans (“toxic” doesn’t even describe them) if they
can’t find investors for the SPV. But Dimon, always focused on other people’s
welfare, told CNBC that his
bank was willing to take that risk: “If we could pull something like that
off, that would be great for Italy,” he said.
So combined, €550 million in investment banking fees for the current
rescue.
But it would only be the latest installment. In 2015, Monte dei Paschi
paid €130 million in fees to a group of investment banks for raising €3
billion in fresh capital, according to Thomson Reuters data. And in 2014, it
paid €304 million in fees for its €5 billion capital infusion. So €434
million in total. Those deals were orchestrated by UBS.
With the current fees, the total rises to €984 million ($1.09 billion at
today’s exchange rate). With a little extra effort they could hit the €1
billion mark.
The sources told Reuters that the Italian government gave its support to JP Morgan’s deal in July after Dimon met with Italian Prime Minister Matteo Renzi in Rome:
As a result, the U.S. bank – which has Italy’s former finance minister Vittorio Grilli as chairman of its corporate and investment bank in Europe, the Middle East and Africa – will be one of the top earners in Monte dei Paschi’s overhaul if the plan goes ahead, sources said.
But it won’t be easy. Reuters:
The large bill reflects the risk that the deal will not happen because investors are reluctant to sign up to the capital increase due to Monte dei Paschi’s history of failed turnaround plans, uncertain market conditions, and fear of increased exposure to the Eurozone’s third largest economy.
“It is way more expensive than any other equity capital markets (ECM) deal in Europe because of the risk profile of the transaction,” said a London-based analyst who stressed the “country risk” adds to the operational complexity of the transaction.
But none of the dozens of banks contacted by the troubled lender in recent weeks to form an underwriting consortium have made firm commitments to guarantee its proposed €5 billion cap hike, sources said.
“This is a pre-underwriting agreement which by definition is not a hard underwriting and is not a commitment,” is how Mediobanca CEO Alberto Nagel explained it. No commitment, no deal.
Any failure of the world’s oldest bank would damage the entire Italian banking system and could spark contagion across Europe so Prime Minister Matteo Renzi’s government has pressured Italian and international investment banks to make the rescue work, sources said.
A spokesman for the Italian government, however, told Reuters he was not aware of any pressure on banks.
Adding to the size of the fees are the uncertainty surrounding the deal and the lack of financial backing from the Italian government, topped off by the risk of more political and market turmoil if the referendum on constitutional reform flops – in which case Renzi has promised he’d resign. It’s scheduled for October, just before the cash call is supposed to happen in November. Impeccable timing.
But if it works…. There are more such deals being lined up in Italy’s banking crisis, including the efforts by UniCredit, Italy’s largest bank and 6th worst performer in the EU bank stress test, to raise capital and shed its nonperforming loans.
And there may be more such deals across Europe in order to get a handle on the broader European banking crisis. But there’
The sources told Reuters that the Italian government gave its support to
JP Morgan’s deal in July after Dimon met with Italian Prime Minister Matteo
Renzi in Rome:
As a result, the U.S. bank – which has Italy’s former finance minister
Vittorio Grilli as chairman of its corporate and investment bank in Europe,
the Middle East and Africa – will be one of the top earners in Monte dei
Paschi’s overhaul if the plan goes ahead, sources said.
But it won’t be easy. Reuters:
The large bill reflects the risk that the deal will not happen because
investors are reluctant to sign up to the capital increase due to Monte dei
Paschi’s history of failed turnaround plans, uncertain market conditions, and
fear of increased exposure to the Eurozone’s third largest economy.
“It is way more expensive than any other equity capital markets (ECM) deal
in Europe because of the risk profile of the transaction,” said a London-based
analyst who stressed the “country risk” adds to the operational complexity of
the transaction.
But none of the dozens of banks contacted by the troubled lender in recent
weeks to form an underwriting consortium have made firm commitments to
guarantee its proposed €5 billion cap hike, sources said.
“This is a pre-underwriting agreement which by definition is not a hard
underwriting and is not a commitment,” is how Mediobanca CEO Alberto Nagel
explained it. No commitment, no deal.
Any failure of the world’s oldest bank would damage the entire Italian
banking system and could spark contagion across Europe so Prime Minister
Matteo Renzi’s government has pressured Italian and international investment
banks to make the rescue work, sources said.
A spokesman for the Italian government, however, told Reuters he was not
aware of any pressure on banks.
Adding to the size of the fees are the uncertainty surrounding the deal
and the lack of financial backing from the Italian government, topped off by
the risk of more political and market turmoil if the referendum on
constitutional reform flops – in which case Renzi has promised he’d resign.
It’s scheduled for October, just before the cash call is supposed to happen
in November. Impeccable timing.
But if it works…. There are more such deals being lined up in Italy’s
banking crisis, including the efforts by UniCredit, Italy’s largest bank and
6th worst performer in the EU bank stress test, to raise capital and shed its
nonperforming loans.
And there may be more such deals across Europe in order to get a handle
on the broader European banking crisis. But there’s no crisis at
Deutsche Bank, really! Read… “We’re
Not Dangerous”: Deutsche Bank’s Chief Risk Officer