It Has Begun in Italy

Monte Paschi "Bails In" Bondholders, Halts $650 Million In Coupon Payments

by Tyler Durden

Recall that three weeks ago we warned that "Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization" although we left open the question of "who will get the haircut including senior bondholders and depositors.... given the small size of sub-debt in the capital structures." Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy's oldest and according to many, most insolvent bank, quietly commenced a bondholder "bail in" after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender. Remember what Diesel-BOOM said about Cyprus - that it is a template? He wasn't joking.

As Bloomberg reports, Monte Paschi "said in a statement that it won’t pay interest on about 481 million euros ($650 million) of outstanding hybrid notes issued through MPS Capital Trust II and Antonveneta Capital Trusts I and II." Why these notes? Because hybrid bondholders have zero protections and zero recourse. "Under the terms of the undated notes, the Siena, Italy-based lender is allowed to suspend interest without defaulting and doesn’t have to make up the missed coupons when payments resume." Then again hybrids, to quote the Dutchman, are just the template for the balance of the bank's balance sheet.

Why is this happening now? Simple: the Merkel reelection is in the bag, and the EURUSD is too high (recall Adidas' laments from last week). Furthermore, if the ECB proceeds with another LTRO as many believe it will, it will force the EURUSD even higher, surging from even more unwanted liquidity. So what to do? Why stage a small, contained crisis of course. Such as a bail in by a major Italian bank. The good news for now is that depositors are untouched. Unfortunately, with depositor cash on the wrong end of the (un)secured liability continuum it is only a matter of time before those with uninsured deposits share some of the Cypriot pain. After all, in the brave New Normal insolvent world, "it is only fair."

To wit:

“In the new world we’re in, bondholders pick up the tab when they can be forced to,” said John Raymond, an analyst at CreditSights Inc. in London. “State aid rules impose losses where possible.”

European Union Competition Commissioner Joaquin Almunia told reporters on Sept. 7 the bank should receive final approval for its restructuring plan within two months. The lender, which received a 4.1 billion-euro bailout, submitted a revised plan that more than doubles the amount of new capital it intends to raise to 2.5 billion euros as it seeks to repay the aid.

Almunia recommended that “cash outflows from the beneficiary to hybrid capital holders and subordinated debt holders be prevented to the maximum extent possible,” in a letter sent to Italian Finance Minister Fabrizio Saccomanni dated July 16 and seen by Bloomberg News.

More importantly, this is just the start:

Monte Paschi’s 108 million euros of undated, non-cumulative trust preferred stock issued through Antonveneta Capital Trust II fell 5 cents on the euro to 41 cents, according to Bloomberg bond prices. That’s the lowest price since April 23, data compiled by Bloomberg show. 

While the bank is halting payments on the bonds that make up its Tier 1 capital, the most-junior layer of debt capital instruments, it also has the equivalent of about 2.6 billion euros of more-senior Upper Tier 2 debt in three issues in euros and pounds. 

While Monte Paschi is making payments on these notes, it isn’t clear that it will be able to go on doing so, said Raymond.

Expect an update from the bank on Wednesday when it will hold a conference call. 

Investors may be betting the bank will buy back the debt “at or slightly below current trading levels,” according to Eva Olsson, an analyst at Mitsubishi UFJ Securities in London. Individual investors in Italy hold many of the bonds and have been an important source of funds for banks in recent years, she said. 

"Monte likely will have to raise capital next year and we view any capital raising exercise in the market as challenging,” Olsson wrote.

Indeed, and best of luck. As for how "bailed in" capital figures in terms of a bank's equity buffer/Tier 1 capital