The Phaserl


LEAKED: Who Profits the Most from Italy’s Banking Crisis?

by Wolf Richter, Wolf Street:

JP Morgan’s deal “would be great for Italy”: CEO Jamie Dimon.

Bank bailouts are a big profitable business. And the collapsing Italian bank Monte dei Paschi di Siena – whose stock is nearly worthless (€0.25), and which was “rescued” twice by investors since 2014, and which now must get an even larger “rescue” or else – has turned into fee nirvana for investment banks, particularly JP Morgan.

Monte dei Paschi was the worst performer in the EBA’s stress test. Under the adverse scenario, its Tier 1 capital ratio plunged into the negative (-2.4%), meaning that its capital would be more than wiped out.

Now there’s another rescue deal in the works, this one far larger than the prior two that have failed so elegantly to solve the bank’s problems. It involves a consortium of banks, led by JP Morgan, according to CEO Jamie Dimon, and in a secondary role, by Italian investment bank Mediobanca. Monte dei Paschi seeks to raise €5 billion in new capital and sell €9.2 billion in bad loans at a deep discount to get them off its books. And the underwriting fees are going to be extraordinarily juicy.

“Three sources involved in the deal” told Reuters that the banks would extract €250 million in underwriting fees from the equity portion of the deal (raising €5 billion).

And there’s more. The deal would also set up a special purpose vehicle (SPV) that would purchase Monte dei Paschi’s bad loans. Funding the SPV would require a €6-billion syndicated bridge loan. JP Morgan is trying to arrange that bridge loan, for which the investment banks could be paid up to €300 million in fees.

Participants in the bridge loan would be stuck with Monte dei Paschi’s nonperforming loans (“toxic” doesn’t even describe them) if they can’t find investors for the SPV. But Dimon, always focused on other people’s welfare, told CNBC that his bank was willing to take that risk: “If we could pull something like that off, that would be great for Italy,” he said.

So combined, €550 million in investment banking fees for the current rescue.

But it would only be the latest installment. In 2015, Monte dei Paschi paid €130 million in fees to a group of investment banks for raising €3 billion in fresh capital, according to Thomson Reuters data. And in 2014, it paid €304 million in fees for its €5 billion capital infusion. So €434 million in total. Those deals were orchestrated by UBS.

With the current fees, the total rises to €984 million ($1.09 billion at today’s exchange rate). With a little extra effort they could hit the €1 billion mark.

The sources told Reuters that the Italian government gave its support to JP Morgan’s deal in July after Dimon met with Italian Prime Minister Matteo Renzi in Rome:

As a result, the U.S. bank – which has Italy’s former finance minister Vittorio Grilli as chairman of its corporate and investment bank in Europe, the Middle East and Africa – will be one of the top earners in Monte dei Paschi’s overhaul if the plan goes ahead, sources said.

But it won’t be easy. Reuters:

The large bill reflects the risk that the deal will not happen because investors are reluctant to sign up to the capital increase due to Monte dei Paschi’s history of failed turnaround plans, uncertain market conditions, and fear of increased exposure to the Eurozone’s third largest economy.

“It is way more expensive than any other equity capital markets (ECM) deal in Europe because of the risk profile of the transaction,” said a London-based analyst who stressed the “country risk” adds to the operational complexity of the transaction.

But none of the dozens of banks contacted by the troubled lender in recent weeks to form an underwriting consortium have made firm commitments to guarantee its proposed €5 billion cap hike, sources said.

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