Finance Friday 06.05.2016

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finance fridayDi Nikola Kedhi

The Atlante fund — named after the Titan god condemned to hold up the heavens for eternity — is the latest attempt of the Italian government to save the banking sector from crippling bad loans. Initially met with skepticism, the fund made its first rescue last week. However, a lot of investors still remain doubtful that the Italian Atlas will keep the sky from falling, believing that it is not enough to provide a permanent solution to the many problems these banks face.

Atlante is a private fund supported by the Italian government that aims to assist struggling banks. This will avoid the use of taxpayers’ money through bail-ins and help stabilize the banking system. Since it goes against European Union regulations to use public funds, the new institution is financed by banks, insurers and other private investors. Overall, the fund has approximately €5 billion of equity and will confront the €360 billion of non-performing loans. The new fund, basically, has two main functions. The first is to buy shares of regional banks, like it did for Banca Popolare di Vicenza. The other one is to buy the bad loans in securitized form, which are worth less than their face value. As the Financial Times reports, the fund will probably have a return of 6% to 10% from these purchases, much lower than the 25% return that private equity bidders make.

When the fund was announced, it was met with great suspicion. The main banks, which will provide the greatest financing, have expressed irritation at being strong-armed by Rome into agreeing to this project. The main concern is that this deal will have the opposite effect and will increase the systematic risk, since the main banks — the healthy ones included — are investing in a highly risky fund. A Bocconi professor, Carlo Alberto Carnevale Maffe, said to Bloomberg that “the fund does not have an adequate capital structure to solve the problems of any bank.” Others have proposed the idea of a financial reboot for the Italian banking system, a process which will certainly take many years. It normally takes 8 years to recover bad loans in Italy, while the EU average is 3 years.

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Despite the criticisms, Atlante performed its first rescue mission last week. It responded to the capital call of the regional lender Popolare di Vicenza. A capital call is a legal right of a financial firm to require its investors to provide a sum of money previously promised. Atlante purchased more than 90% of the new shares at a price of 10 cents per share. The fund replaced UniCredit, which was the initial underwriter. According to regulators, Vicenza did not have the regulatory capital, thus it had to issue new shares. Of the €1.5 billion of new shares, only 7.7% were bought by investors, thus the intervention of Atlante, which has pledged to buy all unsold shares, was needed. Now Atlante will proceed with the restructuring of the acquired bank and then sell it to other Italian lenders.

After this intervention by Atlante, The Wall Street Journal raised the question as to who is the main beneficiary of the bail-in fund. Their conclusion was that the objective was to indirectly save UniCredit, one of the largest Italian banks. It was UniCredit that previously had pledged to help Popolare di Vicenza, but understanding that they could not help with the recapitalization of the regional bank, it opted out. The bank, headquartered in Milan, helped save four banks last November, which caused them to lose almost 40% of their value. If they had gone through with the original plan, they would have been unable to save Vicenza and it would have been a major blow to the global bank. Thus, Atlante was needed not only to save Vicenza’s existence and UniCredit’s reputation, but also spare the Italian banking sector from further shocks.

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This first win has given cause to celebrate to Italian PM Matteo Renzi. Nevertheless, market analysts and economists advise caution. The hope is that eventually different funds will buy the debt tranches. However, even if this happens, they will not be bought at book value, but at their current one, which is much lower. Of course this will cause write-downs, leading to capital calls, as in the case of Vicenza.

ECB President, Mario Draghi, has called the Atlante fund a “first step”. And that is what it remains for now. Many European countries during the crisis used solutions like the creation of one or a series of bad banks and restructuring and workout of loans. Without these further measures, it will be very difficult for the Italian banking sector to finally get the breath of fresh air it desperately needs.

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