Banca Monte dei Paschi di Siena raises capital in a hurry

In June 2014, Banca Monte dei Paschi di Siena (BMPS) raised €5bn in a rights issue designed to shore up its balance sheet and pay back the state aid it had received in the aftermath of the financial crisis. The rights issue was nearly twice the group’s market capitalisation yet, less than six months later, BMPS, the world’s oldest bank, was forced to plan another substantial capital raising after failing the European Central Bank’s (ECB's) stress tests in October 2014.

“We raised the €5bn in the summer of 2014, thinking it would be sufficient, according to the ECB’s manual published in April 2014. But the results of the stress test were different from what we expected,” says BMPS chief financial officer Bernardo Mingrone.

The timing was less than ideal, but BMPS had little choice. “According to the ECB’s comprehensive assessment, Monte dei Paschi had a €2.1bn shortfall, which meant we needed to launch another capital raising. We also still had state aid on our books so we decided to raise €3bn, which would allow us to reimburse the state aid in full, pay down a few other things and cover the costs of the capital raise,” says Mr Mingrone.

Making a date

Rights issues take several months to arrange in Italy, so it was clear from the start that the capital raising would not take place until 2015. “Considering the timing required in Italy to execute a rights issue, there were two available windows between the final decision on our capital plan in November 2014 and the final deadline set by the ECB of July 30, 2015. We could either launch in April on the back of our 2014 data or launch in May or June on the back of first-quarter data,” says Mr Mingrone.

Ultimately, the bank chose the later date, after gaining ECB approval of its capital plan and delivering profitable first-quarter figures. BMPS had used a large group of banks for its 2014 rights issue and decided to appoint most of the same firms for the €3bn fundraising. UBS was lead global co-ordinator, Citi, Goldman Sachs and Mediobanca were co-global co-ordinators, and there were five joint bookrunners: Bank of America Merrill Lynch, Barclays, Commerzbank, Deutsche Bank and Société Générale.

The nine banks acted as an underwriting syndicate for the rights issue, which meant they could be left holding a large amount of BMPS stock if the new shares proved unattractive to investors.

“Naturally, there was a lot of tension and unease about going to the market again," says Mr Mingrone. "We had not expected it and our banks hadn’t either so discussions were long and intense. First and foremost, there was plenty of debate about who got the top slot and which banks had which title because everyone wants to be in the driving seat. Once that was resolved, it became easier. We then had to consider the exact size, price and timing of the offering and make sure the equity story was attractive.”

For Mr Mingrone, the hierarchy of the syndicate relates primarily to governance. “When I want to have a discussion about certain matters relating to the transaction, I don’t want to talk to nine different parties, so there needs to be a leader. But that requires the other banks to have confidence in the leader. Ultimately, however, it worked,” he says.

Meeting and greeting

To maximise the chances of success, Monte dei Paschi met and talked to 200 investors to explain what the bank was doing and why. “After announcing last November that we would need to raise additional capital, we engaged in constant dialogue with our core shareholders and did several roadshows so we were confident that we would be successful,” says Mr Mingrone.

The final terms for the rights issue were set on May 21, when the BMPS board approved the issue of up to 3 billion new shares at a price of €1.17 a share, a discount of 39% on the theoretical ex-rights price. Four days later, the transaction was launched, giving shareholders the right to subscribe for the new shares. The offer closed on June 12, and a week later BMPS was able to announce that the issue had been almost entirely taken up by existing investors.

“It was an anxious period," says Mr Mingrone. "We were confident and the banks were confident in our equity story. We also felt that the 39% discount provided adequate protection from market volatility during the offer period. But there are always macro-economic factors to consider and we live in uncertain times.

“Ultimately, I was very pleased with the way it turned out. The take-up was extremely high and I think that is a testament to all the work that was done."