For Europe’s FIG bankers, Italy is proving to be both a fierce battleground for investment banking mandates and a testing ground for the new regulatory order under the European Central Bank. The battle for mandates is taking place in a febrile climate. The country’s banking sector is deep in the throes of restructuring €340bn of non-performing loans, and lenders from Monte dei Paschi di Siena to UniCredit are looking to raise capital and sell assets.
At the same time, investment banks are struggling to lay the ghosts of previous controversial deals to rest as they pitch for what should be Europe’s most lucrative FIG mandates.
Few investment banking markets are as fiercely competitive as Italy, and the stakes have risen over the summer as the fate of the world’s oldest lender, Monte dei Paschi, hangs in the balance along with the reputations of the banks involved.
Dimon’s balancing act
One bank, JP Morgan, has attracted the most publicity. CEO Jamie Dimon has been assiduously courting the Italian establishment, and the charm offensive appeared to pay off in July when the bank won the mandate to rescue Monte dei Paschi. The deal involved the sale of €30bn of non-performing loans and a €5bn capital raising. JP Morgan beat a rival rescue proposal from a joint venture between Corrado Passera, the veteran Italian businessman and former industry minister, and UBS, a long-standing adviser to Monte dei Paschi.
But JP Morgan’s victory could yet prove pyrrhic. There are deep concerns that the fate of Monte dei Paschi could become entwined with the run-up to Italy’s referendum on constitutional reform, due to be held in late November or early December.
Some investors fear it may not be possible to rescue Monte dei Paschi, and that they may be bailed-in under new EU rules. JP Morgan will also end up holding considerable Monte dei Paschi debt if it can’t sell it on to investors, and there are reports that it is working on an alternative plan to bring in an anchor investor, thought to be the Qataris. But sources close to Monte dei Paschi say the original deal remains on track. The bank’s new CEO, Marco Morelli, a former chairman of Bank of America Merrill Lynch’s Italian operations, is planning to announce the capital increase on October 24 and is aiming to launch the deal in mid-December.
Succeed, and JP Morgan will win bragging rights and with it further mandates. Fail, and it risks losing face to rival UBS, whose proposal remains on the table. JP Morgan has come under fire in the Italian press for being too close to the Renzi government, but one senior Italian banker at a rival firm played this down, calling it “sour grapes.”
La cosa JP Morgan?
JP Morgan is in the thick of the action and the scrutiny comes at the same time as it advises UniCredit, which is now undergoing a strategic review. Since succeeding Federico Ghizzoni as CEO in July, Jean-Pierre Mustier has embarked on a restructuring with impressive speed, looking to boost capital by selling assets such as the bank’s 40.1% stake in Polish lender Bank Pekao and disposing of its asset management arm Pioneer, which could fetch around $3.3bn. Mustier is keen to complete these disposals, or at least identify final bidders before the bank’s investor day on December 13, when he is widely expected to announce a multi-billion euro capital increase.
But conspiracy theorists who suggest JP Morgan, which is advising UniCredit on the sale of Pioneer, has a hammerlock on the Italian banking establishment are wide of the mark, as is the portrayal of Dimon as some sort of investment banking Svengali in Italy.
In reality, raising capital and conducting M&A are the most important strategic moves that a CEO will ever make. That means working with bankers they trust. Mustier has so far leaned heavily on his own set of long-term relationships when picking his banks — JP Morgan, Morgan Stanley and UBS have each landed plum mandates so far.
There is little hint of Italian patronage in Mustier’s choice of bankers. Rather, his team has a strong Gallic presence. The Frenchman turned to a handful of bankers who advised him and his fellow board members at Société Générale in the wake of the Jérôme Kerviel trading scandal.
They include Isabelle Seillier, vice-chairman of EMEA investment banking at JP Morgan. Seillier used to work with Mustier at SG, and was running JP Morgan’s French investment banking operations when JP Morgan acted as one of the lead underwriters on the French bank’s €5.5bn rights issue in 2008. Now based in London, Seillier, along with Guido Nola, JP Morgan’s chief country officer for Italy, is advising UniCredit on the sale of Pioneer.
Morgan Stanley, which was the other co-underwriter on the SG rights issue back in 2008, also has a lead role in shaping UniCredit’s future under Mustier. The US bank is advising on the potential disposal of its shareholding in Pekao, and the banker leading the charge is said to be another French national — Guillaume Gabaix, co-head of Morgan’s EMEA FIG business. He ran the bank’s French FIG business at the time of the SG rights issue. Gabaix is thought to be advising on the Pekao disposal along with Massimiliano Ruggieri, head of investment banking for Italy at Morgan Stanley and a former JP Morgan banker.
UBS is also advising UniCredit on the Pekao sale. The Swiss bank’s close ties with UniCredit stem from the very top of the organisation. UBS Group CEO Sergio Ermotti is a former head of investment banking at UniCredit, while Andrea Orcel, president of UBS’s investment bank, advised former UniCredit CEO Alessandro Profumo on the acquisitive spending spree that transformed the bank from a regional Italian lender into an international powerhouse.
Orcel was mentioned in dispatches as a possible successor to Ghizzoni before Mustier landing the role. In truth, Orcel was never a serious contender, but he was determined for UBS to play an advisory role in UniCredit’s restructuring, and he is understood to be part of the advisory team that is also thought to include Riccardo Mulone, UBS's head of Italy, and fellow managing director Emilio Greco.
This trio of long-serving banks may soon be linked with a bigger prize if, as is widely expected, UniCredit unveils plans to raise capital in the coming weeks. The bank has yet to confirm any plans and no mandates have been formally signed, but JP Morgan, Morgan Stanley and UBS are likely to be among the banks pitching when the time comes.
Waiting in the wings
Should UniCredit push ahead with its expected cash call, it will be interesting to see which other banks will win a role. Though the list of banks advising UniCredit is already impressive, the roster of banks which have not yet been given formal mandates will be just as intriguing.
Possible additions include Orcel’s previous employer, Bank of America Merrill Lynch. BAML acted as sole international global co-ordinator on UniCredit's $9.8bn rights issue in 2012 — the last big mandate in a relationship that goes back 20 years. They also were a global co-ordinator on UniCredit’s $5.6bn rights issue in 2010, and its $3.8bn convertible bond issue in 2009. The question is whether BAML has been able to maintain an institutional relationship with UniCredit since Orcel’s departure.
One Italian banking source said Mustier is understood to know Diego di Giorgi, a former Goldman Sachs partner who joined BAML in 2014 and who is now co-head of global investment banking there.
Goldman Sachs is big hitter with historical ties to UniCredit, not least through Massimo Della Ragione, who joined a decade ago from JP Morgan. While there, he advised on the merger of Germany’s HVB with UniCredit. Della Ragione is co-head of Goldman’s Italian investment banking operations along with Francesco Pascuzzi.
But some have suggested history may hamper Goldman’s chances of involvement. It was an underwriter on UniCredit’s rights issue in 2012, until it walked away from the deal after failing to land a lead role. At that point, Goldman linked up with fellow bookrunners Morgan Stanley and JP Morgan to present themselves as alternative global co-ordinators and requested a vote. When that vote failed, the three US banks walked away. JP Morgan eventually negotiated its way back onto the ticket. It is involved in the current talks, as is Morgan Stanley, but Goldman is nowhere to be seen.
To merge or not to merge
Banks aren’t just facing a fight with each other to win prospective mandates. Italian FIG professionals are also grappling with the brave new world of regulation under the ECB as they try to help solve the country’s banking crisis through consolidation.
The ECB is keen to see Italy’s weaker banks merge in order to survive, but there is little incentive for the institutions to do so. In May, Banco Popolare, which is being advised by BAML and Mediobanca, finally reached an agreement to merge with Banca Popolare di Milano, which hired Citi and Lazard on its end. The agreement followed tortuous negotiations after terms had to be adjusted to meet requests by the ECB, including a condition that Banco Popolare raise €1bn of fresh equity.
“I criticised the ECB’s request for a capital increase because we would have been able to manage our bad loans without tapping investors,” said Pier Francesco Saviotti, CEO of Banco Popolare when the deal was announced. “We decided to do it to comply with regulators, because the finalisation of the operation was the most important thing.”
The combined entity will have a combined market cap of around €5.7bn and the two banks are set to vote on the merger at the EGM on October 15. But irrespective of the outcome, Italy’s FIG bankers are not bracing themselves for a wave of consolidation. “We’re dealing with a dysfunctional regulator,” said one senior FIG banker.
“On the one hand, the ECB says it wants weak banks to merge, but on the other it penalise them for doing so by imposing higher capital charges on the merged entity because of its increased size. They also take an age to make decisions and they are fairly arbitrary when they finally get around to setting things like [the Supervisory Review and Evaluation Process]. Banking CEOs can’t put deals to their shareholders when they have to raise capital first or meet any number of unspecified requirements.”
Restructuring Italy’s troubled banking sector presents a daunting challenge. But it is also an attractive fee opportunity for investment banks. It will be some time before the winners and losers are finally decided, however. The line between success and failure as rarely been so thin.