Italy forms $5.7bn fund to rescue banks

Bloomberg

Italian officials and bank executives agreed to create a multibillion-euro fund to help troubled lenders raise capital and offload bad loans, as the nation tries to assuage investor jitters.
The new vehicle will be named Atlante, private fund manager Quaestio Capital Management SGR said late Monday. It will be financed by banks, insurers and institutional investors including Cassa Depositi e Prestiti, according to the government, and worth about 5 billion euros ($5.7 billion), said Banca Popolare dell’Emilia Romagna Scarl Chief Executive Officer Alessandro Vandelli.
Italian Prime Minister Matteo Renzi is seeking to avoid creditor losses and restore investor confidence in a financial system crippled by an estimated 360 billion euros in soured loans. With the European Central Bank urging companies to clean up their balance sheets and boost capital buffers as the economy struggles to recover from a recession, the country’s lenders have been among the worst performers in Europe this year.
“This is a very, very good step in the right direction,” Marco Elser, a partner at Lonsin Capital, said in an interview with Bloomberg Television’s Guy Johnson on Tuesday. “I don’t think 5 billion euros is enough. The problem really is how to legally solve the non-performing loans—if that’s solved, then Italy is going off to the races as far as the banking system is concerned.”
The government plans to approve additional measures to ease bankruptcy proceedings and reduce time for debt recovery, Renzi said late Monday.

EU Rules
Atlante, named after a Greek mythological god, will act as a buyer of last resort for banks that struggle to raise equity capital in the private markets or that can’t sell off the riskiest portions of their bad debts. The fund is being managed by a private manager, Quaestio, because Italy doesn’t want to fall afoul of European Union rules against providing state aid. Quaestio’s shareholders include Intesa Sanpaolo SpA’s top investor, Fondazione Cariplo.
“The main function is to be a backstopper for all these capital raisings that will come,” Filippo Alloatti, a senior credit analyst at Hermes Fund Managers Ltd., said in an interview on Bloomberg TV with Manus Cranny. “It’s not a ‘bad bank.’ Of course that would have come at a conditionality. They should have done that probably in 2012.”
Bank shares swung between losses and gains. Banca Monte dei Paschi di Siena SpA rose 0.6 percent at 10:26 a.m. in Milan, after earlier surging as much as 8.4 percent, while UniCredit SpA advanced 0.2 percent and Intesa Sanpaolo slipped 2 percent. They have been among the worst performers on the Bloomberg Europe Banks and Financial Services Index this year.
Banca Popolare di Vicenza’s 200 million euros of 9.5 percent junior notes rose 5 cents to 84 cents on Tuesday, extending Monday gains, according to data compiled by Bloomberg. The ECB had said it would put the bank into resolution, imposing losses on creditors, if it can’t raise funds through an initial public offering due this month.
Adding urgency to the plan are Banca Popolare di Vicenza SCpA and Veneto Banca SCpA, which need to raise almost 3 billion euros in total to strengthen capital and avoid resolution measures over coming weeks.
UniCredit is pushing ahead with the initial public offering of Pop. di Vicenza that it’s running. The lender will start gathering orders for the IPO on April 19 and shares should begin trading on May 3, according to terms seen by Bloomberg.

IPO Successes
“The fund aims at ensuring the success of the capital increases required by the supervisory authority to banks that are facing market difficulties, acting as a backstop facility,” Quaestio said in a statement. The fund also will buy the junior tranches of securitized bad loans, helping lenders to deconsolidate non-performing debt from their accounts.
Quaestio, with offices in Milan and Luxembourg, had 10 billion euros of assets under management as of June 2015, according to its website.
“They explained the terms of the issue,” Banca Popolare dell’Emilia Romagna’s Vandelli said. “We look forward to receiving documentation from the ministry, so we can submit it to our boards later.” The stake for state lender CDP has yet to be quantified, he added.
To help stabilize the financial system, the Italian government earlier this year reached an agreement with the European Commission allowing banks to bundle their bad loans into securities for sale, while purchasing a state guarantee for the least-risky portion to make the debt more appealing to investors.
As part of the country’s consolidation efforts, Banco Popolare SC and Banca Popolare di Milano Scarl last month agreed to form Italy’s third-largest bank through an all-stock deal. It’s the biggest transaction in Italy since Banca Monte dei Paschi’s 9 billion-euro acquisition of Banca Antonveneta SpA in 2007.
“The Italian banking system has been under-capitalized, it had too high levels of NPLs, many banks have had weak management and the economic impact has been negative because banks haven’t been strong enough to provide credit,” Bob Parker, a senior adviser at Credit Suisse Group AG, said in an interview with Bloomberg TV. “A reboot of the banking system is very important, sorting out these NPLs is very important. It’s not going to happen overnight.”

Banking bailout looks like an inadequate fudge: Gadfly
Bloomberg

How do you solve a 360 billion-euro ($411 billion) problem with 5 billion euros? With great difficulty. Banks’ non-performing loans are €360 billion.
Italy’s banks are groaning under the weight of 360 billion euros of souring loans, an encumbrance that’s curbed lending (and economic growth) and left investors fretting about lenders’ financial health.
The government finally cajoled the banks, pension funds and insurers into action. But a planned 5 billion-euro bailout fund to help weaker banks bolster capital and to buy bad loans is underwhelming.
For starters, the fund, dubbed Atlante, is small—even if it takes its name from the Greek god Atlas.
It’s significantly less than the 8 billion euros Banca Monte dei Paschi di Siena has raised in two rights offerings since 2014, for example. The Siena-based lender now has a market value of just 1.6 billion euros.
Some more context: a single Italian lender, Popolare di Vicenza, is under pressure from the European Central Bank to raise 1.8 billion euros in coming days.
It’s also difficult to see how Atlante will work in practice. An independent manager, Quaestio Capital Management, will run the fund. But how will it decide which banks to help (and which ones will be left to continue struggling) or which loans to buy?
Such decisions will be fraught with political risk given Italy’s highly fragmented and regionalized banking industry. And it’s hard to see how it will be immune from political pressure.
Finally, there will be concerns about whether Atlante will ever even come to fruition. The major hurdle is European rules that ban state aid to failing companies. Italy’s state lender Cassa Depositi e Prestiti is backing the fund, something that is sure to raise eyebrows with European Union regulators.
The Italian government will be hoping to persuade European regulators that Cassa Depositi’s role is so small the rescue will be classed as a private sector one that won’t fall foul of the state-aid rules.
Prime minister Matteo Renzi will have to keep his fingers crossed that having the healthy banks come to the aid of the weak doesn’t just spread the worst of the banking industry’s problems around.
And then he will have to hope Atlante’s scant resources will be enough to stave off the deepest concerns about the banks and encourage other private investors to put money into the industry.
Here, the government could help itself by speeding up Italy’s leisurely bankruptcy procedures. Current laws are a major impediment to the sale of bad debts to international investors. But here, too, Renzi could run into opposition, this time from lawmakers who view change as a threat to jobs and small businesses.
Investors are going to take some persuading. An index of Italian bank stocks has gained about 10 percent in recent days in anticipation of the government’s plan. But, step back, and the measure is still down about 45 percent from its highest point of the past year. More troublingly, the FTSE Italia All Share Banks Index trades at half book value.
Atlante comes three months after the Italian government’s previous effort to strike a solution to the bad loan problem.
That plan — to offer government-backed guarantees for buyers of bad loans — gained little traction, because it wasn’t clear how it would work in practice and how it would measure up to state-aid rules.
It’s hard to see how Atlante will make much headway.