Italy faces capital demand of more than $8 BLN to offload Monte dei Paschi

Italy has been asked to provide more than 7 billion euros in capital to UniCredit to strike a deal over Monte dei Paschi and offload as much as possible of the state-owned bank to the stronger rival. UniCredit agreed to discuss buying selected parts of Monte dei Paschi (MPS) from Italy’s Treasury. Under the terms of the bailout, Italy must cut its 64% stake in MPS by mid-2022. Negotiations between UniCredit and the Treasury have entered a crunch phase. A preliminary accord was expected in time for a UniCredit board meeting.

A treasury said that talks are in the final stretch and they need to see if the conditions exist to close the deal. Complicating matters for the Treasury, UniCredit agreed to enter exclusive talks over MPS only. This is on condition that an acquisition would leave its capital reserves unaffected while providing a double-digit boost to its earnings per share. The parties have only recently started discussing capital needs. UniCredit sent a proposal to the Treasury that envisages various scenarios depending on the portion of MPS it takes on.

The Italian press reported that a capital injection of close to 7 billion euros was necessary if UniCredit were to take all but 300 MPS branches. UniCredit has said that it is targeting MPS’ branches in Tuscany, Lombardy, Veneto and Emilia-Romagna. The capital outlay would be more than 7 billion euros if UniCredit were to take on the largest possible portion of MPS. With the structure of the deal still under discussion, it remains to be seen how UniCredit’s demands will be met. MPS’ capital raising needs investor participation. This is to comply with EU rules on state aid. UniCredit’s capital requests are much higher than a 2.5 billion euro capital.

While securing a permanent solution to MPS’ woes was extremely costly. UniCredit has said it will steer clear of legal risks stemming from mismanagement and any MPS’ problem or risky loans, which will go to state-owned bad loan manager AMCO. The document said that the legal risks, together with MPS’ assets not transferred to UniCredit or other lenders such as MCC and MPS’ historic properties in Siena, would go to Fintecna.