Securitization Key Tool in Plan to Save World’s Oldest Bank

A state-backed recapitalization plan for struggling Banca Monte dei Paschi di Siena SpA will use securitization of the bank’s non-performing loans (NPLs) to stabilize its balance sheet, according to a recent Bloomberg article.

Bad derivative deals and loans have weakened Monte Paschi. Since 2009, Monte Paschi received, and repaid, 4 billion euros in bailouts, as well as raised 8 billion euros from investors. Last year, Monte Paschi declined 87 percent in market value, followed by its shares being suspended on December 23rd. This year, the bank turned to the Italian government after failing to raise necessary capital from doubtful investors. In order to secure its balance sheet, Monte Paschi needs 8.8 billion euros, with the government expected to provide 6.6 billion euros, and the remainder borrowed from creditors.

The EU collaborated with Italy to detail the final restructuring plan, and the EU has approved the deal. EU law discourages "extraordinary public financial support," signaling a possibly failing institution. "The agreement sets a precedent in how governments can help struggling financial institutions without triggering bank resolution rules forged in the wake of the financial crisis."

Recapitalization begins with removing up to 30 billion euro face value of NPLs from the balance sheet. Alante II is expected to buy the largest portion, and Credito Fondiario SpA and Fortress Investment Group LLC are among the companies discussing investing in the remainder of the "riskiest tranches of the securitization."

Furthermore, Monte Paschi will trade "more secure senior instruments" in return for equity from junior bondholders who were unaware of the risk of their bonds being converted.

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