Monte dei Paschi investors back latest cash call in stormy markets

Shareholders in Monte dei Paschi di Siena (MPS) (BMPS.MI)on Thursday approved a new share sale for up to 2.5 billion euros ($2.5 billion), while doubts linger on whether the state-owned bank can pull off its latest cash call.

Five years after a bailout that handed the state a 64% stake, MPS needs money to cut costs by shedding thousands of staff through costly early retirements and to replenish its capital buffers.

Chief Executive Luigi Lovaglio said MPS would launch its seventh share issue in 14 years in October, while a new government is formed after national elections on Sept. 25.

“This is the official start of the match. Now we race,” he said.

Stagflation fears roiling financial markets complicate Lovaglio’s task, with MPS unable to offer a sufficient discount on its new shares after its market value fell by 60% this year.

Italy will cover 64% of the share issue, but private investors must provide the rest to avoid breaching European rules on state aid.

“We’re focused on bringing home 2.5 billion euros in one go within the expected timeline,” Lovaglio said when asked if MPS could fall short of its maximum target.

MPS needs the money in November to take advantage of laws on early retirement that expire at the end of the month.

Lovaglio, a respected former UniCredit executive whom the Treasury recruited after failing to sell MPS to UniCredit, has secured a pre-underwriting accord with a group of eight banks led by Bank of America, Citi, Credit Suisse and Mediobanca.

The underwriters have the right to walk away if feedback from investors is negative. A person close to the consortium said the banks would assess the market situation after investor meetings Lovaglio will hold in London next week.

MPS’s commercial partners, asset manager Anima Holding (ANIM.MI) and insurer Axa , are open to providing capital to the Tuscan bank in exchange for a strengthening of their commercial agreements, people familiar with the matter have said.

Lovaglio has refrained so far from holding discussions with either because stronger commercial ties would make it harder for MPS to seek a merger partner in the future to allow Rome to cut its stake.

He said Axa and Anima were welcome to invest in the cash call on the same terms as other investors.

“A potential revision of our commercial partnerships cannot but follow the usual rationale for this type of accord, and in the best interests of the bank,” Lovaglio added.

Anima could be willing to contribute up to 250 million euros, one of the people said. News of Anima’s support has lifted MPS shares this week and its subordinated bonds, which had been hit by fears of conversion into equity. ($1 = 1.0026 euros)