Monte Paschi Gambles on Turnaround by Year-End

Italian lender Monte dei Paschi di Siena plans to lay off a tenth of its staff, shut branches and sell assets to win investor backing for a 5 billion euros ($5.4 billion) cash call that could shape the fortunes of the wider banking sector.

In a major gamble by a new CEO appointed last month to save the world's oldest bank, the lender said it would launch a debt-to-equity conversion and a capital increase. The cash call would be held immediately after a Dec. 4 constitutional referendum which could unseat Italy's government and sour market sentiment.

The 544-year-old bank is Italy's third largest, and its ambitious plan calls for the sale of some 28 billion euros ($30.5 billion) in bad loans at below book value.

"Ideally, the capital increase should start in the first seven-eight days of December, subject to market conditions," CEO Marco Morelli told reporters.

The attempted turnaround is the first big test of a state-backed campaign to steady the banking sector and clean up 360 billion euros in problem loans, a third of the total for the entire euro zone.

Tapping the market ahead of the Christmas break would give Monte dei Paschi a first-mover advantage over larger peers such as UniCredit and Deutsche Bank , which are also expected to seek to raise capital in coming months.

However, the Tuscany-based bank, which had announced the main planks of its plan in late July after faring the worst in European stress tests, has faced an uphill struggle to convince investors to back its third recapitalization in as many years.

That task has only been made more difficult by the approach of the referendum on constitutional reform. Prime Minister Matteo Renzi has said he will quit if voters reject the referendum measures, intended to make Italy's government more efficient mainly by reducing the power of the senate.

Morelli, who took the helm of the bank just over a month ago after his predecessor was abruptly removed, made clear there was no plan B apart from the cash call.

He also said that, despite having been approached by several potential anchor investors, he had not yet received "any solid, complete, binding" proposal.

He was due to fly to London later on Tuesday to start a roadshow, and said investors interested in taking part in the bank's fund-raising would be given access to the data room. A source said Middle Eastern sovereign wealth funds were looking at the deal, but there was no firm commitment yet.

To limit the size of the capital increase, the bank - assisted by JP Morgan and Mediobanca - will propose a voluntary conversion of its 5 billion euros in subordinated debt to both institutional and retail investors.

SHAREHOLDER VERDICT

Morelli presented his new three-year strategic plan on Tuesday, including 2,600 job cuts, the closure of 500 branches, and the sale of the payment processing business and platform to recover bad debts. It forecast a net profit of 1.1 billion euros for 2019, and a solid core capital ratio of 13.5 percent.

The plan needs the backing of an extraordinary shareholder meeting called for Nov. 24. Crucially, the cash call will not reserve any pre-emption rights to existing shareholders, who effectively risk losing almost all of their investment.

The prospect of an alternative rescue plan, recently brokered by former industry minister Corrado Passera, could also complicate the outcome of the shareholder meeting.

"The vote is not obvious considering the high dilution coming from the transaction as well as Mr Passera's alternative proposal," broker Kepler Cheuvreux said in a note.

Morelli said the bank had a duty to examine all proposals but made clear all potential investors would be treated equally and that his roadmap for the bank was already in place.

The bank's shares have rallied sharply over the past week, buoyed by Passera's rival scheme and short-covering ahead of the plan's presentation.

On Tuesday, the stock reversed an initial 20 percent surge to fall 10 percent by 0825 ET, even though initial analyst comments on the plan were positive. The shares are down 75 percent since the beginning of the year.

Highlighting the challenge ahead, Monte dei Paschi - which has already raised 8 billion euros from investors since 2014 - said it would book a 2016 loss of 4.8 billion euros due to higher writedowns on bad loans. That would bring losses since 2011 to around 20 billion euros.

($1 = 0.9189 euros)

(Editing by Mark Bendeich and Peter Graff)