European banks face next big hurdle

David Hellier
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THIS is the deal of all deals, one of the many bankers working on the £6.2bn cash call at Italy’s largest bank UniCredit said to me yesterday.

As far as those in the capital markets are concerned, the new year festivities are well and truly over.

The forthcoming blockbuster fund-raising exercise for UniCredit provides the litmus test by which all other cash hungry European banks’ plans will be judged.

The success or failure of the UniCredit issue will surely determine how the majority of the European banks, who need a total of £88bn to plug a capital shortfall, will get there.

Will they, as hoped, be able to tap the equity markets or will they instead need to go cap in hand to governments for yet more bailouts?

Yesterday shares in the Milan-based UniCredit fell as much as 14 per cent as it priced its cash call at a 43 per cent discount to its ex-rights theoretical share price (or a staggering 69 per cent lower than the shares’ latest quoted price).

This is the kind of discount last seen in the aftermath of the credit crunch when even a relatively robust bank like HSBC had to raise funds at a discount of around 40 per cent.

Some said yesterday that, given the state of the Eurozone, they were surprised the discount had not been even larger.

But whatever the case, the scale of the discount reminds markets of just how difficult it will be to keep private investors engaged with the banking sector.

At the same time, others pointed out that the discount seemed reasonable enough given the size of the deal; the volatility in the markets; and the three weeks or so timescale before the offer closes.

Most at risk if the deal were to go wrong are Bank of America Merrill Lynch and Mediobanca, who between them carry the bulk of the underwriting risk.

This means, though, that whatever the take-up, UniCredit will get its much-needed cash to take its capital ratios up to the levels stipulated by the regulators.

Yesterday it seemed as if the banks had persuaded around 24 per cent of investors to get behind the deal at this early stage. This includes support from at least one of the Libyan state’s two shareholdings that amount to a total holding of 7.5 per cent.

Fortunately for UniCredit and its bankers, the change of regime in Libya makes it easier to solicit financial support from that source at such a critical time.

But bankers were also confident that a high percentage of the retail investors, who account for 20 per cent of the stock, would also subscribe.

“We’re starting with around half of the issue already spoken for,” said one source, hopeful that the final tally would reach around 90 per cent or higher.

If investor sentiment does look like dragging, the banks behind the deal – and there are a good few of them, (excluding Goldman Sachs and Morgan Stanley who failed to make it into the syndicate) ­– have been looking outside the investor base for possible support, reaching out to sovereign wealth funds and hedge fund players.

The rights offer is expected to close around the end of January, by which time the fate of many of Europe’s capitally challenged banks might have become a lot clearer.

Allister Heath is away