In recent days, the news on Monte dei Paschi di Siena has made more than a few savers jump from their seats and the share prices on Borsa Italiana have accelerated downwards – the following graph speaks for itself. Now, calmly, let's see what happened and how much there is to worry about.
THE FACT: THE CONVERSION OF SENIOR BONDS WITHOUT GUARANTEE
Premise: Banca Mps needs capital, 5 billion euros, and at the moment the market is certainly not teeming with investors eager to invest in the ancient Sienese institution. So, in a nutshell, if it doesn't come from the market, the money must come from the bondholders, in strict hierarchical order of subordination, from the riskiest to the safest - if these words sound as obscure as the language of Mordor to you, read here what are the degrees of subordination of bonds and how do they work.
In this context, here comes the idea of the most imaginative Italian bank: in addition to the conversion into shares (otherwise called debt-equity swap) of the Tier 1 and Tier 2 subordinated bonds, Banca Mps reserves the possibility of offering the conversion into shares including senior bonds.
HOW MUCH SHOULD THE BONDSHOLDERS WORRY?
A little and a lot. But let's proceed in order. The holders of senior unsecured bonds need to worry relatively little (secured ones are, as the name suggests, covered by the guarantee), since the hypothesis of conversion is, precisely, only a hypothesis. And, above all, it would not be an obligation, but a hypothesis of a conversion offer. Offer that can be declined: it is difficult that the terms of the offer could be more attractive than a meat loaf forgotten in the refrigerator.
As Mario Seminerio rightly observed during the radio broadcast "I Conti della Belva" on 5/11 (in which I also participated), it is enough to apply a little game theory to realize that, if ever this offer were carried out, the senior bondholder would probably be better off refusing and seeing how it turns out. In the worst case scenario the bank will be bailed in – if that's a mystery term to you, , promising find the explanation – and before senior unsecured bonds get involved, it takes a long time.
The greatest risk is that the bank could try to convince savers of the "fabulous opportunity to convert senior bonds into MPS shares". There is no shortage of persuasion, given the quantity of subordinated bonds placed with savers in the past. So: it's only a hypothesis, but be careful, because, when cornered, MPS will try to convert anything into shares, even bottles of Chianti, batches of Cinta Senese lard and finocchiona.
The very fact of fearing a possible conversion of senior bonds is a huge communication error: certain taboos shouldn't even be touched (on the subject of "things you'd better not say, especially if you're a bank" I'll come back shortly).
HOW IS MONTE DEI PASCHI MASS?
In general, the situation of the bank is certainly worrying, as it lacks a convincing medium- and long-term strategy – if you're curious, here's MPS business plan. Above all, an investor is missing to take the reins of the situation: the Lancelot who launches the bank in safety is currently untraceable.
The situation is such as to make the Sienese bank declare, putting it in black and white in the document destined for the shareholders' meeting, that the recapitalization depends on the outcome of the constitutional referendum of 4 December. Irresponsible gesture.
True, everyone knows that there is an intimate link between a country's government and its banking system (I remind you that MPS is the third largest Italian bank), given that banks are "special" companies, central to the functioning of the economic machine. And everyone knows that the constitutional referendum will be an important check for Italy.
But some things can also not be said publicly. In life some things can be left unsaid, right? But no, Mps has seen fit to write them in an official document, which ended up directly on the front pages of the newspapers. So now the systemic risk associated with the constitutional referendum is compounded. And Mps proves, once again, to be a great compendium of the mistakes that a bank can make, even in corporate communication.
With the uncertainty surrounding the future ownership of the bank, if a major investor cannot be found for MPS, some form of involvement of the holders of subordinated bonds, even retail, is very likely, it is useless to tell stories: the probability of default in 1 year drawn from the quotations of the CDS is currently equal to 44% for MPS (yes, forty-four, but it fluctuates a lot ... on Friday it was 65% ...), two orders of magnitude higher than that of Intesa Sanpaolo, and an order of magnitude greater than that of Unicredit – and orders of magnitude are almost everything in life…
Source: Advise Blog
