Specialist Italian pension funds have agreed to a government call to invest in bad bank loans, as Rome works to build a safety-net around Italy’s No. 3 lender Monte dei Paschi ahead of the European bank stress test.
The Tuscan bank, which has one of the heaviest bad loan burdens in Italy, is likely to be found short of capital under an adverse scenario when results of the latest Europe-wide banking check-up are released on Friday night. Reuters reported.
In a bid to reassure the market, Italy is looking for ways to support its banks without breaking European Union state aid rules that would require investors to take a hit first.
AdEPP, the association of sector-specific pension funds, said on Monday a decision had been taken to support a new bank fund called Atlante 2. Each fund will need to approve the investment.
AdEPP chairman told Reuters the government had asked its members to invest in Atlante, which is working with Monte dei Paschi on the sale of bad debts worth a net €10 billion ($11 billion).
A source familiar with the matter said Rome had asked for a €500 million investment.
Atlante, hastily set up in recent months to help Italy’s weakest banks, has used more than half of its initial €4.25 billion endowment to take over two failing regional banks.
The source said the new fund would only invest in bad loans and not bank equity.
Problem loans totaling €360 billion after a three-year recession have become the focus of investor concerns over Italian banks, weighing heavily on their shares.
Sources have said Italian state lender Cassa Depositi e Prestiti is also ready to provide up to €500 million to the new Atlante fund. A similar amount would come from SGA, another treasury-controlled entity.
Selling Bad Loans
To comply with a request from European Central Bank supervisors to clean up its balance sheet, Monte dei Paschi last week submitted to the ECB a plan to sell its bad loans and is hoping for a green light by Friday.
Under the plan, Atlante would buy the bank’s loans from borrowers deemed insolvent in a complex scheme that aims to leverage fivefold the fund’s residual resources of €1.75 billion, sources have said.
Atlante is ready to buy the loans at a higher price than investors specializing in distressed assets would offer, but that would still be below the portfolio’s net book value, blowing a hole in the bank’s account and forcing it to raise capital.
A source close to the matter said Atlante would likely buy the loans at 30-32% of their nominal value, against a current valuation of 37% in the bank’s books.
Monte dei Paschi may struggle to raise cash at a time when sector profits are being squeezed by negative interest rates and poor asset quality. But EU state-aid rules have hampered Italy’s efforts to backstop Monte dei Paschi’s capital raising.
Monte dei Paschi shares, which have lost 76% this year, ended down 8.4% on Monday.
