July 28, 2016 / 6:22 PM / 4 years ago

UPDATE 1-Monte dei Paschi scrambles to ready bailout plan by Friday

(Adds details of bailout plan from sources)

By Pamela Barbaglia and Francesca Landini

LONDON/MILAN, July 28 (Reuters) - Italy’s Monte dei Paschi di Siena,, which is scrambling to put together a privately backed bailout, suffered a setback on Thursday when three banks turned down a request to back a planned 5 billion euro ($5.5 bln) cash call.

The troubled lender is trying to pull together a banking consortium to guarantee its proposed capital increase in the next 24 hours so it has a plan in place by the time the results of European bank stress tests are released on Friday evening.

Banking sources say the tests will show the bank has insufficient capital to withstand an economic downturn and Monte dei Paschi is racing against the clock to ease regulatory concerns over its stability.

A source familiar with the matter told Reuters on Thursday Morgan Stanley and Italian lenders UniCredit and Intesa SanPaolo had rebuffed Monte dei Paschi’s request to join the consortium, which is expected to underwrite in full the 5 billion euro cash call.

However, the Tuscan bank has so far received interest from Citigroup, Bank of America, Deutsche Bank and Credit Suisse, the source said.

The consortium will also include Mediobanca and JPMorgan who are acting as global coordinators for the capital hike, the source said.

Other banks including Societe Generale, UBS and Nomura are currently being contacted in a bid to share the cost of the proposed transaction, which is said to involve Monte dei Paschi issuing stock at between 0.5 and 0.6 percent of its tangible book value, the source said.

Another source, who is close to the Tuscan lender, said however that Monte dei Paschi was expected to release the guidelines of its rescue plan on Friday and was confident of reaching a pre-agreement with a sufficient number of banks “in due time.”

Monte dei Paschi, Mediobanca, JPMorgan, UniCredit and Intesa declined to comment. The other banks were not immediately available for comment.

The bailout plan also includes a clean-up of the bank’s balance sheet through the spin-off and sale of 10 billion euros of net non-performing loans, several bankers said.

The health of the 544-year-old bank, the world’s oldest, poses a threat to the wider Italian banking system, the euro zone’s fourth largest, and also to the increasingly weak political standing of Prime Minister Matteo Renzi.

Crucially, the bailout plan for Monte dei Paschi - based in Renzi’s home region of Tuscany - has yet to be approved by the European Central Bank.

Under the plan, the 5 billion euro cash call - which would be Monte dei Paschi’s third capital increase since 2014 - will be launched at the end of this year if possible, or more likely in early 2017, one source said.

In the meantime, Monte dei Paschi will pool its worst bad loans into a vehicle and put them up for sale at an average price of 31 percent of their nominal value, two sources said.

One source said the loans will be wrapped up in securitised bonds and divided in tranches. The senior, or least-risky, portion will be sold on the market with a guarantee from the Italian state, to obtain a better price. Because that process is expected to take about a year, JPMorgan will grant a bridge loan of around 5 billion euros to the vehicle.

The mezzanine tranche will be sold to the recently created bank bailout fund Atlante, which is financed by around 60 mostly Italian financial institutions.

The fund is scrambling to boost its firepower by around 2 billion euros by getting additional contributions from a number of players, including private pension funds, the post office and state lender Cassa Depositi e Prestiti.

The junior, or riskiest portion of the bad loans, will be given to Monte dei Paschi’s current shareholders as a special dividend or “payment in kind,” the source said.

The transfer will be made at book value, meaning Monte dei Paschi would not have to book a further loss on this tranche of soured debts.

Monte dei Paschi has 47 billion euros of gross bad loans and is the most exposed of a group of weak Italian banks whose pile of bad debts and capital shortfalls are threatening contagion to other euro zone banks. ($1 = 0.9025 euros) (Additional reporting by Paola Arosio and Silvia Aloisi in Milan, Stefano Bernabei in Rome; Writing by Silvia Aloisi; Editing by Rachel Armstrong and Susan Fenton)

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