DBRS Downgrades Banca Monte dei Paschi’s Senior LT Debt to B (high); Ratings Remain Under Review Neg

DBRS Ratings Limited (DBRS) has today lowered Banca Monte dei Paschi di Siena SpA’s (BMPS or the Bank) Senior Long-Term Debt & Deposit rating to B (high) from BB. The Bank’s Intrinsic Assessment (IA) was also changed to B (high). The Bank’s Short-Term Debt and Deposit rating remains at R-4, and the long / short term Critical Obligations Ratings remain at BBB (low) / R-2 (middle), but all ratings are still Under Review with Negative Implications (URN). DBRS does not rate the Bank’s Subordinated Debt. The rating actions are detailed in the table at the end of this press release.

Today’s downgrade reflects DBRS’ view that the risk for the Bank’s bondholders has notably increased, due to the higher execution risk for the Bank’s capital plan announced on July 29, 2016. Following a further deterioration in market conditions and sluggish investor appetite, the feasibility of the Bank’s planned EUR 5 billion rights issue has become increasingly challenging. BMPS’ share price has fallen by 85% since the beginning of the year and 39% since the announcement of the rights issue. As of September 29, 2016, the Bank had a market capitalisation of EUR 552 million which is almost a tenth of the planned capital raise.

Taking into consideration the difficult market conditions and modest investor appetite, on September 26, 2016, BMPS announced that, as part of its capital raising plan, it plans to carry out a liability management exercise. This would likely be a voluntary conversion of BMPS’ debt instruments into equity. BMPS’ board of directors is expected to approve the Bank’s business plan on October 24, while the shareholders’ meeting will be called by the end of November.

In DBRS’ view, the potential conversion is likely to involve BMPS’ Tier 1 and Tier 2 instruments, which are held by institutional and retail investors for a total consideration of approximately EUR 5 billion. The successes of a voluntary conversion, in the form of an offer to a fragmented investor base, will largely depend on the terms of the offer, including any potential incentive mechanism and/or thresholds, as well as market conditions. Although DBRS does not rate the Bank’s subordinated debt, it would likely view any liability management exercise as a distressed exchange if the terms of the exchange are disadvantageous to bondholders.

If successful, the conversion could facilitate BMPS’ recapitalisation by partially reducing the size of the capital increase, but BMPS’ capital deficit could remain still sizeable after the conversion. Furthermore, equity capital market conditions remain challenging and uncertain. In DBRS’ view, the outcome of the Italian Constitutional referendum set for December 4, 2016, will be critical for investor confidence and market appetite for BMPS’ capital. Additional execution risk is posed by the timing of the Bank’s capital increase, which is taking place at a time of increasing uncertainty in the European banking sector.

During the review period, DBRS will evaluate BMPS’ business plan, including any update on the progress of the planned NPL sale, as well as the Banks’ revised capital plan. In parallel, market conditions and investors’ appetite will also be monitored. In addition, DBRS will review BMPS’ 3Q 2016 results, including any potential negative implications for the Bank’s funding and liquidity positions linked to ongoing uncertainty for the Bank’s restructuring.

The Critical Obligations Ratings was not lowered along with the senior debt and deposit rating and remains at BBB (low) / R-2 (middle) URN. This reflects DBRS’ expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and being included in a going-concern entity.

RATING DRIVERS
The ratings are currently Under Review with Negative implications. Any upside pressure is highly unlikely in the short term.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligation Rating Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company’s reports, SNL Financial and Bloomberg. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Nicola De Caro
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: January 18, 2013
Most Recent Rating Update: July 12, 2016

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