Italy rescue fund manager hits back at critics

Monte dei Paschi di Siena (MPS) “got lucky” in this summer’s €5 billion state bailout of two regional banks, says Paolo Petrignani, CEO of Quaestio Asset Management.

Based in Milan, Petrignani’s firm has been at the centre of Italy’s banking crisis since it won the mandate to manage the sector-backed but state-orchestrated rescue fund, Atlante, last year, but it has not been without controversy.

Atlante spent €2.5 billion on the two Veneto region banks’ equity in spring 2016. After the European Central Bank (ECB) ruled they should be wound down this June, that stake is now worthless.

However, Petrignani says the subsequent injection of state cash to allow the sale of the banks’ residuals assets to Intesa Sanpaolo freed up €450 million that Quaestio had earmarked for the Veneto banks’ non-performing loan (NPL) books.

The fund could therefore add that amount instead – and at the last minute – to its purchase of MPS’s €26 billion bad-debt securitization, announced in early July.

“It’s a big success,” says Petrignani, discussing the securitization. “The big overhang in the Italian banking system is much diminished and almost completely resolved.”

Still, many in Milan’s financial community say Quaestio bears some responsibility for the cost of Banca Popolare di Vicenza and Veneto Banca’s bailouts to the taxpayer: potentially as much as €17 billion.

MPS had until June 27 to agree a deal to deconsolidate NPLs, to get the green light from EU competition authorities for its €8.8 billion state precautionary recapitalization, allowing its survival.

The deal floundered when US investment funds Elliott and Fortress exited talks to participate alongside Atlante in the purchase of 95% of the securitization’s junior and mezzanine tranches in mid-June.

The ECB’s decision to liquidate the two Veneto banks came just days later. However, the subsequent injection of state money also propped up MPS, by freeing Atlante of what Petrignani calls a moral commitment to invest the €450 million in the two banks’ soured debts – enough to replace Elliott and Fortress in the MPS deal.

“Ironically, the liquidation of the Veneto banks allowed the investment in MPS,” says Petrignani. “It wasn’t planned that way; it was pure coincidence. If it [the Veneto bailout] had happened a week later it would have been a problem. … Banking crises are by definition a chaotic process.”

MPS is securitizing the NPLs at just 21 cents on the euro. Italian bank stocks rose on the news, in contrast to the renewed sell-off after last year’s announcement by MPS of a recapitalization plan involving a securitization to Atlante at 33 cents, which was supposed to be an optimistic benchmark.

UniCredit’s later €17.7 billion NPL securitization with Fortress and Pimco was far less optimistic, with a rumoured price in the high teens, although news of that deal and a €13 billion rights issue for UniCredit sparked rises across the sector.

Petrignani explains that the price in the original plan was higher as it included warrants, while MPS has extracted value from the book during the year’s delay to the deal.

“The portfolio is older, so it’s worth less, and we were under pressure to find other investors,” he says. “There’s more of a sense of a market price compared to six months ago. … Now we’re more aligned with the market price.”

The CEO describes last year’s aborted plan, which failed as MPS could not raise private money to fund the attendant write-downs, as “the most intense period of useless work in the history of finance”. He concedes it gave the firm insights into the portfolio.

Yet there will be no winning back the €2.5 billion Atlante injected into the two Veneto banks. Last year’s flop of the two banks’ ECB-mandated IPOs, underwritten by Intesa Sanpaolo and UniCredit, led to Atlante’s creation last spring, with money extracted from the sector.

Sources who advised the bidders criticize Quaestio for rejecting approaches for the Veneto banks last year, they say out of ill-founded faith in the value of the deteriorating lenders.

“They did the usual tinkering, and the choice of management was peculiar,” says one source. Another source questions whether Quaestio’s team has sufficient expertise in bank and bad-debt management.

Petrignani rubbishes the seriousness of the offers the two banks received before the bailout – they were not “worth the paper they were written on”, he says. He says the fund contributed to solving the Veneto banks’ problem when it deployed a further billion in January to help the banks give cash settlement in litigation charges.

The asset manager has also bolstered its staff with expertise in NPLs and securitization since winning the Atlante mandate.

Some in Milan’s financial community point to Quaestio’s influential connections in its success in gaining the mandate to deal with the rescue.

The biggest shareholder alongside management is Cariplo, widely regarded as the most powerful of the Italian bank foundations, and the third biggest shareholder in Intesa Sanpaolo after BlackRock.

Cariplo’s president Giuseppe Guzzetti is a former president of Lombardy, the region around Milan. Quaestio’s other shareholders also have a primarily charitable and Catholic character.

Petrignani, who founded the firm alongside finance professor Alessandro Penati in 2010, started his career at Salomon Brothers in New York in the 1990s, working in securitization.

Asked why Quaestio won the mandate, he says it had the benefit of independence from banks – and Italian nationality.