UniCredit’s glum backers have crumbs of comfort

January 12, 2012

By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

UniCredit’s underwriters must need a stiff drink. The Italian bank’s 7.5 billion euro rights issue has prompted a sharp sell-off that has left its shares hovering dangerously close to the 1.94 euro subscription price. A further slump could stuff the 26 other banks that have guaranteed the offering with large quantities of unwanted shares. That would be embarrassing, but need not be a disaster.

To begin with, the issue hasn’t failed yet. One cause of last week’s selloff was panicky European investors reducing their exposure to Italy. But the overleveraged public-sector foundations that own a big chunk of UniCredit have also been reducing their exposures, according to a person familiar with the situation. With these flushed out, investors may be attracted by the chance to buy into UniCredit at around a quarter of the bank’s likely year-end book value. Since touching a low of 2.20 euros on Jan. 9, the shares have risen 15 percent.

The most likely outcome is that a majority of shareholders take up the offer, leaving the underwriters to place the remaining rump. This should be manageable. Mediobanca, which is leading the issue alongside Bank of America Merrill Lynch, successfully placed the 5 and 6 percent of shares respectively left over from last year’s rights issues by UBI Banca and Banca Popolare di Milano.

But if UniCredit shares fall below the subscription price, the underwriters could be left holding all but the 11 percent that existing shareholders have irrevocably agreed to take up. That would be painful. Bank of America Merrill Lynch and Mediobanca each have 10 percent of the issue – equivalent to 670 million euros. If they were forced to offload those shares at a loss, the damage would far exceed the 250 million euros that UniCredit is paying in underwriting and consulting fees.

Banks could hold on and wait for a rebound. But marking their shares to market will make earnings volatile and drag on capital. Underwriters can try hedging their exposures, but Italy’s current short-selling ban makes this tricky. UniCredit’s sell-off hasn’t been matched by the rest of the sector: while the bank’s shares slumped almost 40 percent last week, Europe’s main bank share index fell just over 6 percent.

All in all, UniCredit and its shareholders face a tense few weeks. But the real financial losers from the turmoil are other European banks that also need to raise fresh capital. After the UniCredit roller-coaster, underwriters may think twice before signing up for another bank rights issue.

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