Vicenza, Veneto Said to Need Up to $3.5 Billion State Funds

(Bloomberg) -- Banca Popolare di Vicenza SpA and Veneto Banca SpA, the rescued Italian lenders that are in merger talks, may request as much as 3.3 billion euros ($3.5 billion) of state funds in a rescue plan that will depend on the banks' ability to minimize litigation risks, people with knowledge of the matter said.

The two banks submitted a merger plan to the European Central Bank earlier this month that includes a capital increase of 4.5 billion euros, said the people, who asked not to be identified because the matter is private.

Under the plan, the banks would request a precautionary recapitalization that includes a mandatory conversion of about 1.2 billion euros of subordinated bonds and an injection of capital for the remaining amount by the Atlante fund controlled by Italian lenders and the 20 billion-euro government rescue program approved in December. Terms of the transaction are still under review and could change, according to the people.

The Treasury may inject 2 billion euros to 3.3 billion euros, depending on Atlante's ability to provide additional resources to the two lenders, said the people. Atlante, which owns the two banks, may participate in the capital raising if it's able to convince its investors to use sister fund Atlante 2 as the vehicle, one of the people said. Atlante 2 was created last year to invest in banks' bad loans, while Atlante can provide both capital and invest in soured debt.

Emergency Cash

Atlante gave 2.5 billion euros of emergency cash to Vicenza and Veneto in June after investors balked at their initial public offerings. The fund injected an additional 938 million euros in January as the banks seek to settle lawsuits by offering compensation to retail shareholders for losses on their investments in the banks. The settlement offers, which expire in March, are contingent on at least 80 percent of eligible investors accepting them.

The ECB is studying the merger proposal and is expected to complete the review by the end of March after the outcome of the settlement offers, according to the people. The success of these agreements are essential for the banks to proceed with a precautionary recapitalization because a failure would raise litigation risks, jeopardize the rescue and could lead to a resolution.

“It's very hard to consider the bank solvent if legal issues aren't settled,” said Gianluca Codagnone, head of Fidentiis Equities in Milan. “The full potential losses calculated on the proposed reimbursement could be higher than 3 billion euros.”

Pop. Vicenza's 200 million euros of junior bonds due in September 2025 fell 1 cent to 26 cents on the euro, extending a record low, according to data compiled by Bloomberg. Veneto Banca's 200 million euros of similar-maturity notes also fell to a record 26 cents.

The two banks plan to sell about 10 billion euros of bad loans through securitization backed by a state guarantee, according to the people. The rescue project also includes the sale of assets, such as a combined 40 percent stake the two lenders own in fund management firm Arca Sgr, and cutting operating costs by 30 percent to 40 percent.

Spokesmen for the two banks and Quaestio, the company that runs Atlante, declined to comment. The Italian Treasury also declined to comment.

--With assistance from Tom Beardsworth

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net.

To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Ross Larsen, Andrew Blackman