Banca Monte dei Paschi : Hasty return to the Tier 2 market: a daring but costly move

Only a few months after imposing burden sharing on holders of Tier 2 debt, the precondition for its recapitalisation by the Italian state, BMPS is daring to return to the market with plans for a new Tier 2 10NC5 issue. - >Investors may need yield, but they do not have amnesia: they will need convincing about the future success of the recovery plan, which is indispensable to avoid a new burden sharing. If the bank were to face capitalisation problems again following the provisions required to clean up its balance sheet (ECB, 2018 stress tests), a fresh recapitalisation by the Italian state would undoubtedly be coupled with a burden sharing process (probable conversion into equity) for Tier 2 debt. - Many signals are admittedly positive: the bank has been recapitalised and has a comfortable CET1 ratio of 14.5%, the strategic plan is progressing smoothly on the cost reduction front, and growth in loans and deposits in the first nine months of 2017 illustrated that customers are returning and renewing their trust in the bank. - However, some crucial steps of the recovery plan still have to be completed: finalisation of the securitisation of € 26bn of NPL, disposals of other NPLs by its own means, a return to profitability in 2019 and, above all, a return to the bond market (subordinated and SNP) to strengthen its capital and respect future MREL requirements. - But BMPS has no choice: this precipitous return to the market was planned as part of its recovery process. Given the conversion of subordinated debt into equity, the Tier 2 component is currently nil and has to be filled with core Tier 1 capital. Tier 2 issues for a total amount of € 1.3bn would fill the mandatory 2% RWA component and free up the same amount of common equity Tier 1 to respect buffer and Pillar 2 requirements. Subsequently, MREL requirements will oblige the bank to issue senior non-preferred debt, and this will be far easier if the Tier 2 debt buffer has been rebuilt. - - The yield offered will depend on the success of this operation, especially as the panel of investors likely to be interested is limited (because of Tier 2 ratings of Caa2/CCC+). The closest comparables in the Tier 2 segment are Banco BPM 2027/2022 B2 with a YTC of 4.12% and Liberbank 6.875% 03/2027 BB- with a YTC of 4.2%. We prefer the AT1 Caixa Geral de Depositos 10.75% callable 2022, which is rated Caa2 and offers a YTC of 5.9%.