A history of financial engineering at Monte dei Paschi
Following a stress test result that saw its stressed capital ratio dip into negative territory, Monte dei Paschi di Siena is once again turning to heavy duty financial engineering to save its skin, with a giant non-performing loan securitization — the largest ever structured — to clean its balance sheet and unlock a €5bn rights issue. The bank, however, has a tradition of relentless innovation in finance, which hasn’t always served it well.
Here are a few of the highlights:
The Alexandria trade restructured previous Monte dei Paschi derivatives hedges against its Italian government bond portfolio, but was of sufficient size that it breached regulatory limits for MPS’s exposure to Nomura.
Though the wind-up of the deal, and the related lawsuits, were eventually settled, MPS was around €1bn out of the money on the deal in 2015, though it had sued Nomura for more than that figure in the Italian courts. Nomura sued in English courts to collect on the deal.
Another large, balance-sheet concealing derivative trade, this time with Deutsche Bank, referencing MPS’s stake in Intesa Sanpaolo. The original trade was signed in 2002, but went sour in 2008, when Intesa shares collapsed in value. Rather than take a €367m loss, MPS chose to replace the trade.
By the time it liquidated it in 2009, it was able to book a gain on that leg of the trade, but lost on a linked exposure to Italian government bonds.
Santorini and Alexandria combined had a total nominal value of around €5bn, according to the Bank of Italy, which also said that the trades had “risk profiles which were not adequately monitored or measured by MPS, nor fully reported to the board”.
Retail buyers are not exactly mainstays of the European CMBS market, for obvious reasons, and the notes suffer, as all sale-and-leaseback deals do, from very close credit linkage to the tenant. That took the rating on the senior notes from A- when issued to B- earlier this year.
The senior notes have amortised from €1.536bn to €1.087bn, but investors are unlikely to be thrilled by their interest payments. The deal switched from paying 3% for the first two years to 105bp over six month Euribor (now 0.86%).
The deal courted further controversy, according to the Italian press, with Mediobanca (joint arranger on the new NPL rescue) asked to hold onto €58m of the notes, in return for a role on the top line of every MPS deal until December 2013.
It followed the original with another deal in 2005, and then a more controversial trade to fund its acquisition of Antonveneta in 2008. The trades are similar to the CoCoCo product (only used by Bank of Cyprus and Marfin Popular Bank so far) in that they sought to cut costs of loss-absorbing subordinated debt by adding in an option to participate in equity upside.
But the bonds were actually issued by a JP Morgan managed SPV. MPS issued equity to JP Morgan, with swaps contracts between the banks to create the investor exposure to MPS.
Following the investigation into the Antonveneta acquisition, and the prosecution of MPS’s management in 2013, prosecutors alleged the bank had given indemnity letters to JP Morgan, the arranger, and BNY Mellon over possible losses on the deal — then lied to the Bank of Italy about it. Prosecutors claimed the indemnities stopped the notes working as loss absorbing capital.
This was but one part of the Antonveneta package, which also included €2bn of upper tier two, €1.5bn of bridge loan, and the €1bn FRESH issue (see above). Unsurprisingly, bankers found this package of issuance congenial — presumably, the fees poured out for the banks that were in the driving seat.
MPS followed this with a €5bn issue in June 2014, then a €3bn issue in 2015. The bank has, so far, stayed one step ahead of nationalisation, thanks to its apparently tolerant shareholders, but with its market cap back down to €1bn, you have to wonder how it can keep raising capital.
The recourse was to Goldman, to Sumitomo Mitsui Trust, and to a portfolio of RMBS. Which included a good chunk of previous retained or privately placed Monte dei Paschi RMBS from 2007.
It’s not known how Goldman got hold of the notes, which were not syndicated to the market, but MPS has certainly used its securitization shelf to raise private financing, particularly in 2013-2014. The bank was known to have contacted several ABS trading desks in this period seeking repo lines or bids for retained issues.
Tiziano Finance/MPS Asset Securitisation
The deals securitized investment loans to MPS customers. The investment loans, in turn, were used to buy equity mutual funds and zero coupon bonds. Guess who issued the zero coupon bonds? MPS!
Around 50% of the first deal, the €348m Tiziano Finance, was backed by units of the Ducato Azionario Europa fund, managed by MPS Asset Management, with about 50% backed by MPS-issued zero coupon notes.
MPS Asset Securitization, a €1.7bn deal, upped the percentage of MPS-issued zero notes to 60%. As 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 in the MPS group. These are rated in the single-A band — yet the deal is rated up to triple-A.”
And after the trade was done? It took around a year for borrowers backing the deal to start complaining they had been mis-sold the loans.
In fact, its third ever securitization was an NPL deal, issued in 2001 to shift some of the loans before a window of favourable tax treatment was set to close. JP Morgan was on that trade, too, and senior notes were placed at 50bp over Euribor.
It dribbled out other NPL trades, backed by the books of its various regional subsidiaries — Banca Toscano in October 2001, Banca Popolare di Spoleto in 2002. Investors though, back then, seemed more blasé about such small matters as credit quality.
Fitch warned that “no loan by loan information was available on the mortgage pool owing to Banca Toscana’s relatively unsophisticated information system”.
(A lot of ) Securitization
The deals were not the famed CDOs of ABS, given such high billing in films like The Big Short and blamed for the crisis. But there were still a few features that might have made one’s hair stand on end.
A deal in 2001, Anthea, was semi-synthetic — part of the portfolio was a package of cash bonds, rounded out with some synthetic exposures, created through CDS with Credit Suisse First Boston.
Though the exposures were to “investment grade names”, it turns out that most of the cash bonds were issued by Italian banks. A source in a treasury department involved in the deal told EuroWeek at the time that “the original portfolio had high concentration levels in the Italian banking sector, and was also illiquid because of its longer maturities”. There were also, as it turned out, a couple of ABS bonds in the portfolio as well.
Adding the CDS exposures, however, raised the rating agency “diversity score” of the portfolio, essential in getting the notes to a triple-A rating. Can you improve credit quality by mixing good with mediocre? Apparently you could in 2001.
Equity-linked investors apparently had a tough time with MPS’s 2004 exchangeable bond in Banca Nazionale del Lavoro stock. The €448m deal “plummeted in value” when BBVA offered €6.3bn for BNL, threatening to lower the volatility of the stock and reduce the value of the option. Traders told EuroWeek at the time that investors in the issue would be lucky to break even on the bond even in the event of an all-cash offer from BBVA.
The issue swallowed up another exchangeable into BNL stock, which Banca Popolare di Vicenza had planned to issue. MPS combined both and placed the trade via Deutsche Bank.