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Italian Risk Reversal

15 November 2016 by lberuti

MONTE ( Banca Monte dei Paschi ) gave some details about their debt for equity exchange yesterday night. They plan to offer equity worth between 85% and 100% of face value to the holders of their €4.3Bln outstanding subordinated bonds. The generous terms reflect the need to deliver on this transaction as fully as possible. Indeed, they want to keep the amount of fresh external equity to be raised to a minimum, as the €5Bln total capital increase planned before the end of the year is instrumental in a process that should lead to the deconsolidation of their almost €28Bln portfolio of non-performing loans. Renewed confidence in the success of the deal led investors to send MONTE’s 5-year risk premium 12bps tighter to 392bps, and benefitted the whole Italian complex which outperformed other members of the European financial sector. Meanwhile, the broader credit market benefitted from the stabilisation of interest rates in Europe and in the US which held onto their overnight (modest) gains throughout the session. iTraxx Crossover and CDX High Yield were the outperformers (closing 9bps and 16bps tighter at 341bps and 418bps respectively), while iTraxx Main (ITXEB) and CDX IG closed 1.5bps and 3bps tighter at 77.5bps and 75bps respectively. Tomorrow is option expiry day on credit indices, and chances are that ITXEB will be attracted by the 75bps strike which represents an important option pin.