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Too Many Balls In The Air?

25 October 2016 by lberuti

Over the last fortnight, MONTE’s ( Banca Monte dei Paschi ) stock has roughly doubled. The 5-year risk premium of its senior debt has been cut by 125bps to 350bps since late September. This morning, it looked as if this amazing ride could continue for a while. The company outlined plans to eliminate 2,600 jobs, shut 500 branches and slash the lender's €28Bln pile of bad loans. That sent the stock another 20% up and the debt risk premium another 20bps tighter. To complete its turnaround, the bank also needs to raise €5Bln in fresh capital by year end though, and the CEO admitted that his effort had only begun in that respect. The plan involves a voluntary debt to equity swap, in order to cut the amount MONTE would need to raise from shareholders. The bank wants to spin off €28Bln of souring loan, swap debt for equity and manage a capital increase all at the same time in an exceptionally compressed timeframe. To make things trickier still, there is the December 4 constitutional referendum in Italy which could lead to a increased volatility towards the end of the year. When that reality hit investors, they sent the stock 30% down from its - 15% down on the day -and the risk premium back to almost unchanged on the day.