Apr 29

Italy’s Bank Bailout Fund Already One Third Empty After First Bank Rescue:

When one month ago, Italy was scrambling to unveil a “last resort” bad bank bailout fund (which eventually received the name Atlante, or Atlas, for the Titan god who was condemned to hold up the sky for eternity, only in this case he is holding up Italy’s €360 billion in bad loans), many wondered why the rush? While the explicit purpose of the fund was to allow Italy to bailout insolvent banks without the involvement of the state which is expressly prohibited by the Eurozone, the scramble appeared erratic almost frentic, and was one of the reasons why Italian bank stocks tumbled in early February.

The question: “Does someone know something?”

It turns out the answer was yes, because as we learn today, “Atlas” is about to become the proud new owner of around 90% of Italy’s Popolare di Vicenza after investors only bought a fraction of the mid-tier bank’s €1.5 billion IPO, Reuters reports.

Popolare di Vicenza, which was due to announce the outcome of the public share offer later on Friday, said earlier in the day that it had raised €4.25 billion, at the lower end of a 4-6 billion euro range it had initially targeted, from 67 mostly domestic financial institutions.

And if the low take-up for the Popolare di Vicenza share sale is confirmed, Atlas is about to see nearly a third of its fire-power invested in a single bank.

Alessandro Penati, chairman of the Quaestio investment firm which manages the fund, said Atlante would aim to sell any stake it may get in Vicenza after 18 months. Good luck with finding buyers unless the ECB is openly monetizing bank stocks by then, which at the rate Mario Draghi is going (and especially if he listens to advice from JPM) is a distinct possilbity.

“Atlante has the financial resources to fully support Popolare Vicenza’s capital increase,” said Penati. The fund will probably buy most of the shares as institutional investors showed little interest.

According to Reuters, it was not immediately clear whether Popolare di Vicenza, which must raise the cash to comply with capital requirements set by the European Central Bank (ECB), would have enough free float to list on the market next week as planned. The minimum free float required to list is 25 percent of the share capital, but the Milan bourse can make exceptions.

Meanwhile, Atlas’ Penati said his fund was set up as a backstop investor to avoid banks like Popolare di Vicenza being wound down and triggering a crisis for the whole industry. What he didn’t say is that “backstop investor” also means owning over 90% of the bank.

The fund targets an annual return of around 6 percent and will spend 70 percent of its cash to invest in cash calls at ailing banks, he said. He added that the rest would be used to buy junior tranches of bad debt from banks at a higher price than that offered by funds specialised in distressed securities, but not at book value – meaning banks would have to book further writedowns.

Traders said that contributed to pushing bank share prices down on Friday, with UniCredit dropping 5 percent.

One big problem for Italian banks is that they are saddled with €360 billion of NPLs but are reluctant to sell them at a discount because that would erode their capital.

Another big problem is that the very same Atlante, announced earlier today that it has only manged to raise €4.25 billion from 67 Italian and international intuitions, a tiny fraction of what will ultimately be required.  While analysts say Atlante should have enough money to buy between 20 billion and 35 billion euros of gross non-performing loans, for now it has about one fifth to one ninth of that amount. And as of this moment it has €1.5 billion less.

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