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A Unicredit bank in Rome, Nov. 14, 2011. (STEFANO RELLANDINI/REUTERS)
A Unicredit bank in Rome, Nov. 14, 2011. (STEFANO RELLANDINI/REUTERS)

UniCredit rights issue priced at huge discount Add to ...

UniCredit launched a €7.5-billion ($9.7-billion U.S.) rights issue at a massive discount on Wednesday, highlighting the struggle faced by European lenders under pressure to raise capital to counter a spreading debt crisis.

Italy’s largest bank by assets was forced to launch the biggest rights issue by a European bank for more than a year to repair its ravaged balance sheet and meet stringent capital rules meant to enable the region’s lenders to withstand the crisis and restore investor confidence.

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The closely watched share offer was priced at a 69-per-cent discount to Tuesday’s closing price – a much higher discount than that used by UniCredit’s peers in recent rights issues and a level which may discourage other lenders from tapping the market to raise money.

The European Banking Authority has told banks they must to find €115-billion of extra capital by the end of June to reach a minimum core capital level of 9 per cent – with lenders in Italy, Spain and Germany needing the most.

At €8.0-billion, UniCredit’s shortfall is the biggest of any bank after Spain’s Santander, which needs €15-billion to meet the EBA requirements – a crucial plank of efforts by euro zone leaders to avoid financial disaster.

Andrew Lim, banks analyst at Espirito Santo, said the discount on UniCredit’s capital increase was “massive.”

“Whatever way you slice and dice it, UniCredit’s discount is much bigger than for the other banks and that being the case, I think it’s come as a bit of a shock to some investors, and I think some of them are just bailing out,” he said.

UniCredit shares, which have lost more than half their value over the past year as the crisis spread to Italy, fell 10 per cent after it detailed the issue, and were down 8.5 per cent at midday.

In another sign of the challenges faced by the bank, UniCredit said commitments by shareholders so far would result in a maximum subscription of around 24 per cent of the new share offer – a lower take-up than had been anticipated.

The consortium of banks underwriting the issue, led by Mediobanca and BofA-Merrill Lynch, was extended to spread the risk of part of the offer not being taken up by the market, and is now made up of 27 lenders.

The rights issue, which will start on Jan. 9 and conclude on Jan. 27, represents more than 50 per cent of the bank’s current market capitalization of €12.5-billion.

Centrobanca analyst Elena Perini calculated that an issue price of around €2 would lead to a dilution of adjusted earnings per share of nearly 65 per cent in 2012-13.

Another analyst said that at 24 per cent, the take-up by UniCredit’s historic shareholders – including cash-strapped foundations which hold around 13 per cent of the bank – was lower than expected.

“From the comments we had had, we were expecting 30, 35 per cent...That’s a big adjustment,” said the London-based analyst, asking not to be named.

In the run-up to the capital hike, Blackrock fund cut its stake in UniCredit to 1.7 per cent from 4 per cent. The Libyan sovereign wealth fund, whose 2.6-per-cent stake was frozen in the wake of the civil war, has not yet said whether it would sign up to the offer.

That could open the door to new investors, with Italian media citing Chinese and Singaporean sovereign funds as possible candidates. UniCredit CEO Federico Ghizzoni has said he would welcome new shareholders if they were interested in the bank’s long-term development.

UniCredit announced the rights issue in November, together with 6,150 job cuts and a retreat from key business operations to repair its balance sheet after revealing a €10.6-billion third-quarter loss due to massive writedowns.

It priced the two-for-one rights issue – its third capital increase since 2008 – at 1.943 euros per share.

The price represents a discount of 43 per cent to the theoretical ex-rights price (TERP) – the market price a stock theoretically has after a new rights issue.

Intesa Sanpaolo priced its rights issue last year at a 24-per-cent discount to the TERP. Smaller Italian lender Banca Popolare di Milano priced its recent rights issue at a 40-per-cent discount, while a rights issue by German group Commerzbank last May came at a 30-per-cent discount to the TERP.

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