MILAN: More than 8 billion euros of legal claims against Monte dei Paschi di Siena, its weakening liquidity and the possibility of more bad loan writedowns are among the risks the Italian bank said could scupper its 5-billion euro rescue plan.
In a 146-page prospectus for a debt swap offer that is a crucial plank of an attempt to stave off being wound down, Monte dei Paschi warned on Monday of "considerable uncertainty" surrounding the whole plan.
The Tuscan lender's disclosure comes as Italian bank shares are being hammered by fears a Dec. 4 constitutional referendum could unseat the government of Prime Minister Matteo Renzi.
The risk of a bail-in - or resolution of the bank under European rules that impose losses on its bondholders - is mentioned 30 times by the Tuscan lender, which fared the worst in European stress tests of banks in July.
The bank is seeking to raise 5 billion euros through the conversion of subordinated bonds into equity, a private placement to one or more anchor investors and a share sale on the market. It has so far failed to secure a firm commitment by potential cornerstone investors ahead of the Dec. 4 vote.
"In light of the considerable uncertainty surrounding completion of the different parts of the overall deal, there is a risk that the deal itself may not succeed and cannot be concluded," it said. Shares in the bank had fallen 10 percent to 18 euros by 1257 GMT, having lost 86 percent of their value so far this year.
DOMINO EFFECT FEARED
Fears that a Renzi defeat at the referendum could sink Monte dei Paschi's recapitalisation plan and have a domino effect on Italy's battered banking sector - where another seven lenders are in trouble - pushed the banking index down 2.4 percent.
UniCredit's own expected capital increase for up to 13 billion euros, which should be launched early next year, could also face market turbulence if Monte dei Paschi's fails.
In the prospectus for the debt swap, which starts on Monday, Monte dei Paschi said a European Central Bank inspection of its loan portfolio could lead to further writedowns "with a significant negative impact" on its capital and finances.
This audit is underway and its results are expected in the first half of 2017, after the scheduled completion of the rescue plan.
The ECB has also found that Monte dei Paschi's liquidity position has weakened due to deposit outflows - which the bank is trying to stem by offering higher interest rates than competitors - and the shrinking pool of assets it can put up as collateral for funding.
As a result, the ECB has asked Monte dei Paschi - whose direct funding fell by 14 billion euros in the first nine months of 2016 - to come up with a detailed funding plan for each year through to 2018.
The bank also said that it faced potential legal claims from civil lawsuits totalling 8.4 billion euros. Although such claims are usually far larger than what will ever be paid, Monte dei Paschi has set aside just 627 million euros to cover them.
The debt-to-equity conversion offer targets bonds for an outstanding amount of 4.3 billion euros and aims to raise just over 1 billion euros. It will run until 1500 GMT on Friday, barring an extension. The share sale is expected to start on Dec. 7 or 8.
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