DBRS Downgrades Banca Monte dei Paschi’s Senior Rating to B (low); Review Changed to Developing

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 (low) from B (high), and the Bank’s Short-Term Debt & Deposits rating was downgraded to R-5. The Bank’s Intrinsic Assessment (IA) was also lowered to B (low). Concurrently, DBRS changed the review on BMPS’ B (low) / R-5 ratings to Developing from Negative Implications. The rating actions are detailed in the table at the end of this press release.

Today’s downgrade reflects the heightened execution risk for the Bank’s planned market recapitalisation, as well as increased investor concerns over political stability in Italy following the outcome of the Constitutional referendum. Against this backdrop, BMPS has submitted a request to the ECB to extend the deadline for completing its capital plan to January 20, 2017, from the initial date set for December 31, 2016, but unofficial indications are that the extension is unlikely to be granted. Although DBRS still does not see a bail-in of the Bank’s senior debt as being the most likely outcome, the increasing likelihood that the Bank may not be able to successfully raise the EUR 5 billion from the markets and may need to rely upon state intervention is a key factor in the downgrade to B (low). The change of the review on BMPS’ ratings to Developing implications reflects DBRS’ view that the ratings may be downgraded, confirmed or upgraded depending on the evolution of the Bank’s recapitalisation.

BMPS, which reported a negative CET1 ratio of 2.2% under the adverse scenario of the July 2016 EBA stress test, has been attempting to raise EUR 5 billion in additional equity via a complex plan with three interlocking pieces: (i) a debt-to-equity swap, (ii) a capital increase, and (iii) the disposal of a significant portion of non-performing loans (NPLs). On December 2, BMPS’ bondholders agreed to convert approximately EUR 1 billion of subordinated notes into equity as part of a voluntary offer on EUR 4.3 billion in Tier 1 and Tier 2 instruments.

Following the debt conversion, the next step in this process for the Bank is the requirement to raise around EUR 4 billion in equity. This had been expected to come from a tranche reserved for anchor investors, as well as a capital increase (fully non pre-emptive) for the existing shareholders. However, in the context of weak investor appetite and increasing political risk post the Constitutional referendum, on December 11, the Bank announced its intention to re-open the debt-to-equity offer for its junior bondholders subject to the authorisation of the relevant authorities. In addition, DBRS notes that the Bank’s capital increase is no longer supported by a pre-underwriting agreement with a consortium of domestic and international banks. The failure to complete the capital plan by year-end 2016, could potentially result in the resolution of the Bank or trigger a precautionary recapitalisation under the EU’s State Aid rules. Although burden sharing with junior debt instruments is already a part of the Bank’s recapitalisation plan, it still appears less likely that a bail-in of senior debt instruments will take place, given the potential knock-on effect on the rest of the Italian banking system.

The Critical Obligations Ratings (COR) were not lowered along with the senior debt and deposit rating and remain at BBB (low) / R-2 (middle) Under Review with Negative Implications (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 a covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and are likely to be included in a going-concern entity.

RATING DRIVERS
The B (low) / R-5 ratings, which are currently Under Review with Developing Implications (URD), may be downgraded, confirmed or upgraded depending on the evolution of the Bank’s recapitalisation. During the review period, DBRS will consider any progress of the Bank’s capital plan, as well as the possibility of burden sharing and bail-in under State Aid rules. As part of the review, DBRS will also monitor any potential negative implications for the Bank’s liquidity position linked to the ongoing uncertainty for the Bank’s recapitalisation.

Notes:
All figures are in Euros 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), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), Critical Obligations Rating Criteria (February 2016) and DBRS Criteria: Guarantees and Other Forms of Support (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 documents, ECB and EBA information. 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, Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: January 18, 2013
Most Recent Rating Update: September 30, 2016

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