A history of financial engineering in Monte dei Paschi


Here are some of the highlights:

A spin-off transaction with Nomura, signed in 2009, that turned into brutal acrimony, losses on both sides ($290 million for Nomura, $130 million for MPS), each side suing the other, penalties jail for the chairman, chief executive and chief financial officer, and the bank asking for a bailout.

The Alexandria transaction restructured Monte dei Paschi’s previous derivative hedges against its portfolio of Italian government bonds, but was of sufficient size that it exceeded regulatory limits for MPS’s exposure to Nomura.

Although the deal wind-up and related lawsuits were eventually settled, MPS was around €1 billion of the deal money in 2015, despite suing Nomura for more than that figure before Italian courts. Nomura sued in the English courts to collect the deal.

The bank’s management concealed key documents from regulators and did not disclose the size of the position in its accounts.

Another large balance sheet concealing a derivatives trade, this time with Deutsche Bank, referring to MPS’s stake in Intesa Sanpaolo. The original deal was signed in 2002, but went awry in 2008 when Intesa shares crashed. Rather than incur a loss of €367 million, MPS opted to replace the trade.

By the time he liquidated it in 2009, he was able to make a gain on that part of the trade, but lost on exposure related to Italian government bonds.

Santorini and Alexandria combined had a total face value of around €5 billion, according to the Bank of Italywho also said the deals had “risk profiles that were not sufficiently monitored or measured by MPS, nor fully reported to the board.”

Meaning strong house in Italian, the €1.67 billion CMBS deal, issued in 2010, is a classic sale and leaseback transaction, backed by Monte dei Paschi’s agency network, and sold via the branch network of Monte dei Paschi, to its retail customers.

Retail buyers aren’t exactly the mainstay of the European CMBS market, for obvious reasons, and tickets suffer, like all sale and leaseback transactions, from a very tight credit tie to the lessee. This raised the rating of the senior notes from A- when they were issued to B- earlier this year.

Senior notes have written off from 1.536 billion euros to 1.087 billion euros, but investors are unlikely to be thrilled with their interest payments. The deal went from a 3% payout for the first two years to 105bp on six-month Euribor (now at 0.86%).

The deal sparked further controversy, according to the Italian press, with Mediobanca (joint arranger of the new NPL bailout) asked to keep 58 million euros worth of tickets, in exchange for a role on the front line of every MPS transaction until December 2013.

MPS was a pioneer of the “Floating Rate Equity Linked Subordinated Hybrid”, launching the second deal after Fortis. JP Morgan (now the bank’s savior in times of need) structured the deal in 2003.

It followed the original with another deal in 2005 and then a more controversial swap to fund its acquisition of Antonveneta in 2008. The swaps are similar to the CoCoCo product (used only by Bank of Cyprus and Marfin Popular Bank so far ) in that they sought to reduce the costs of loss-absorbing subordinated debt by adding an option to participate in rising equities.

But the bonds were actually issued by an SPV managed by JP Morgan. MPS issued shares to JP Morgan, with swap contracts between the banks to create investor exposure to MPS.

Following the Antonveneta acquisition investigation and lawsuit against MPS management in 2013, prosecutors alleged the bank issued letters of indemnification to JP Morgan, the arranger, and BNY Mellon for possible losses on the deal – then lied to the Bank of Italy about it. Prosecutors claimed that the indemnities prevented the notes from functioning as loss-absorbing capital.

Maybe that hardly counts as financial engineering, but MPS certainly does a lot. Along with the €5 billion fundraising announced on Friday, Monte raised €4.092 billion in 2008, with €849 million more in preferred shares.

It was just part of the Antonveneta package, which also included a €2 billion second-tier top, €1.5 billion bridging loan and the €1 billion FRESH issue. (see above). Unsurprisingly, bankers found this package of emissions enjoyable – presumably, the fees paid for the banks that were in charge.

MPS followed with a €5 billion issue in June 2014, followed by a €3 billion issue in 2015. The bank has so far kept a head start on nationalisation, thanks to its apparently tolerant shareholders, but with a market capitalization back down to €1 billion, you have to wonder how he can continue to raise capital.

Not a transaction issued by Monte dei Paschi, but certainly shrewd financial engineering, it was a triple recourse bond issued by Goldman Sachs last year.

The recourse was to Goldman, Sumitomo Mitsui Trust and a portfolio of RMBS. Which included a good part of the old RMBS Monte dei Paschi preserved or placed in private from 2007.

It’s unclear how Goldman got hold of the notes, which weren’t syndicated in the market, but MPS certainly used its securitization platform to raise private funding, notably in 2013-2014. The bank was known to have contacted several ABS trading desks during this period seeking repo lines or bids for successful issues.

Tiziano Finance/MPS Asset Securitization

An enthusiastic pioneer in the securitization market, MPS was pushing the limits as early as 2001, with this pair of large transactions.

The transactions securitized investment loans to MPS customers. Investment loans, in turn, were used to purchase mutual funds and zero-coupon bonds. Guess who issued the zero coupon bonds? MPS!

Around 50% of the first transaction, Tiziano Finance’s €348 million, was backed by shares in the Ducato Azionario Europa fund, managed by MPS Asset Management, with around 50% backed by zero-coupon bonds issued by MPS.

MPS Asset Securitization, a €1.7 billion operation, increased the percentage of zero notes issued by MPS to 60%. Like EuroWeek (GlobalCapital’s predecessor) said at the time, “The most complex part of the credit story, however, is that many of the zero-coupon bonds used are issued by Italian banks, mainly from the MPS group. These are notated in the simple A band – but the chord is notated up to triple-A.

And once the exchange is made? It took about a year for borrowers who supported the deal to start complaining about being mis-sold.

NPL’s big new elimination plan is definitely not the first round of the MPS block.

In fact, its third securitization was an NPL agreement, issued in 2001 to transfer some of the loans before the closing of a favorable tax treatment window. JP Morgan was also on this trade and senior bonds were placed 50 basis points above Euribor.

It dribbled past other NPL deals, backed by the books of its various regional subsidiaries – Banca Toscano in October 2001, Banca Popolare di Spoleto in 2002. Investors, however, at the time seemed more jaded on such minor matters than credit quality.

Fitch warned that “no loan-by-loan information was available on the mortgage pool due to Banca Toscana’s relatively unsophisticated information system.”

(Lots of) Securitization

There’s nothing wrong with a little securing, but MPS was a real enthusiast. In October 2001, EuroWeek reported that the bank closed six deals that year, and three in October alone. It became the market’s second-largest securitization issuer, after the Italian sovereign, and regularly priced giant RMBS deals from its Siena Mortgages shelf.

Sticking to RMBS would have been too simple. Monte has also dabbled in synthetic and semi-synthetic CDOs.

The deals weren’t ABS’ famous CDOs, given such high billings in movies like The big court and blamed for the crisis. But there were still a few features that could have made your hair stand on end.

One transaction in 2001, Anthea, was semi-synthetic – part of the portfolio was a set of cash bonds, supplemented by some synthetic exposures, created via CDS with Credit Suisse First Boston.

Although the exposures were to ‘investment grade’, it turns out that most of the cash bonds were issued by Italian banks. A source at a Treasury Department involved in the deal said EuroWeek at the time that “the original portfolio had high levels of concentration in the Italian banking sector, and was also illiquid due to its longer maturities”. It turned out that there were also some ABS bonds in the portfolio.

However, the addition of the CDS exposures increased the rating agency’s portfolio “diversity score”, essential in bringing the ratings to a triple-A rating. Can you improve credit quality by mixing good and poor? Apparently you could in 2001.

Equity investors apparently struggled with MPS’s 2004 exchangeable bond for Banca Nazionale del Lavoro shares. The 448 million euro deal “dropped in value” when BBVA offered 6.3 billion euros to BNL, threatening to reduce the stock’s volatility and reduce the value of the option. traders said EuroWeek at the time investors in the issue would have the chance to break even on the bond even in the event of an all-cash offer from BBVA.

The issue engulfed another exchangeable into BNL shares, which Banca Popolare di Vicenza had planned to issue. MPS combined the two and placed the trade through Deutsche Bank.


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