By Max Colchester and Giovanni Legorano
After repeated efforts to salvage Italy's most troubled banks,
the country's government is leaning on an unlikely would-be savior:
James Dimon.
The J.P. Morgan Chase & Co. chairman and chief executive is
an Italophile, his bank has long had a presence in Italy and it has
built close ties to the government. It also offers what few
European banks can: a vast balance sheet to back a cleanup
operation.
Resuscitating Italy's banks is a daunting task laden with risk,
and it is among the central challenges of European finance. The
Italian banking system is burdened by hundreds of billions of euros
of bad loans, and many of its smaller banks are on their knees.
Postcrisis rules curtail the Italian government's ability to ride
to the rescue with bailouts, leaving the job to the private
sector.
It appears to be getting harder by the day. Perennially troubled
Banca Monte dei Paschi di Siena SpA's shares have slipped lower and
lower -- down by over half in just three months.
J.P. Morgan has positioned itself as Italy's best hope. In July,
it elbowed competitors aside to lead a high-stakes plan to rescue
Monte dei Paschi, after petitioning the bank's board and talking to
high-level Italian government officials. It is also among the
lenders pitching to help Italy's largest bank, UniCredit SpA, drum
up at least EUR8 billion ($8.9 billion) of capital, according to
people familiar with the matter. And it recently helped small
lender Banca Popolare di Bari SCpA to shift half a billion euros of
bad loans off its balance sheet.
Its role hasn't gone unnoticed. "I think J.P. Morgan is getting
too much influence on Italian banking affairs," said Pietro
Laffranco, a member of the Forza Italia opposition party and a
member of the Italian parliament's commission on financial
affairs.
This summer Mr. Dimon visited Italy to celebrate J.P. Morgan's
100th anniversary in the country. During a lunch with Italian Prime
Minister Matteo Renzi and the country's finance minister, they
discussed the situation at Monte dei Paschi, according to a person
familiar with the matter.
"I love Italy myself," Mr. Dimon, who has an Italian
great-grandparent, told a local newspaper during his visit. "I
wished I could spend more time here."
J.P. Morgan's biggest challenge will be Monte dei Paschi,
Italy's third-largest bank. The Tuscan lender needs to raise EUR5
billion of equity and sell off EUR28 billion of bad loans. J.P.
Morgan is leading the work on evaluating and selling the bad loans
into a separate vehicle, which will likely be funded with a loan
from it and other banks. The U.S. bank is also casting about for
investors who will pump fresh capital into Monte dei Paschi.
It is unclear how much J.P. Morgan and the other banks involved
will get paid in return. Monte dei Paschi's board agreed only to
pay its advisers EUR240 million in fees if the full equity amount
is raised, according to people familiar with the deal. So far no
bank has pledged to underwrite the Monte dei Paschi equity
raise.
Potentially more lucrative is a plan to fund a vehicle packed
with Monte dei Paschi bad loans with a roughly EUR6 billion loan.
This could still yield several hundred million euros in fees and
interest payments for the banks involved, bankers say. It is
unclear how much J.P. Morgan will lend the vehicle.
Some investors are skeptical that the plan will work. Monte dei
Paschi has already tapped shareholders twice for EUR8 billion in
fresh funds in the last few years. That money has been all but
vaporized: Monte dei Paschi's stock-market value is about EUR550
million.
The bank's board recently ditched both its chairman and CEO amid
muted investor enthusiasm for the latest plan, which will take
place after an Italian constitutional referendum on Dec. 4 or could
be delayed until early next year.
To raise the EUR5 billion of equity to recapitalize the bank,
junior bondholders may now be encouraged to switch debt for shares,
which could generate up to EUR2.5 billion in funds, people familiar
with the deal say. To fill part of the remaining shortfall, bankers
are hoping to find a group of sovereign-wealth funds or hedge funds
to act as anchor investors, these people add.
Preliminary discussions are being held with Qatari funds to
invest EUR1 billion into the bank, according to one person familiar
with the deal. A final hurdle will be convincing Monte dei Paschi's
battered shareholders to sign off on a transaction that will
greatly dilute their stakes.
If the deal to salvage Monte dei Paschi fails and mom-and-pop
investors who put their savings into its bonds are burned, then
panic could ripple through Italy's fragile banking system. If J.P.
Morgan succeeds, it will burnish its reputation as the Italian
government's favored consigliere and open the door to a stream of
other local banks that need to restructure or merge.
In sliding into the lead role on Monte dei Paschi, J.P. Morgan
has pushed aside Swiss rival UBS Group AG, which has twice advised
the bank on past capital increases. Andrea Orcel, president of
UBS's investment bank, was once the Tuscan lender's go-to
adviser.
The Italian government has been trying to purge bad loans from
its banking system for the last three years. Around the start of
the year, J.P. Morgan helped the government formulate a plan to
bundle up bad loans and sell them off with state guarantees. So
far, just one bank has used the guarantees.
In March, J.P. Morgan, led by Guido Nola, co-senior officer for
the bank in the country, pitched bolder plans to solve Monte dei
Paschi's woes. So did UBS. UBS teamed up with a former Italian
government minister to pitch their solution. They said that the
Italian lender couldn't raise EUR5 billion from investors and would
need to push bondholders to switch debt for shares. They added it
would be difficult to execute a plan before the end of the year,
according to people familiar with the matter.
Italian treasury officials and the Monte dei Paschi board backed
the J.P. Morgan plan. It was made public alongside the results of a
European stress test that showed the Italian bank would collapse in
a major downturn.
The U.S. bank became "global coordinator" for the rescue along
with Italian bank Mediobanca SpA. Banks are currently doing due
diligence on the loans that will be split into the bad bank and
sold off to investors. Mr. Dimon is getting updates several times a
week, according to a person familiar with the matter.
Write to Max Colchester at max.colchester@wsj.com and Giovanni
Legorano at giovanni.legorano@wsj.com
(END) Dow Jones Newswires
September 27, 2016 11:07 ET (15:07 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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