By Silvia Aloisi and Valentina Za
MILAN (Reuters) - More than 8 billion euros of legal claims against Monte dei Paschi di Siena <BMPS.MI>, its weakening liquidity and the potential for more bad loan writedowns are among risks the bank says could scupper its 5-billion-euro rescue plan.
In a 146-page prospectus for a debt swap offer that is a key plank of the rescue scheme aimed at keeping the bank in business, Monte dei Paschi warned on Monday of "considerable uncertainty" surrounding the whole plan.
The bank, the world's oldest still in business, made its disclosure to markets fearful that a Dec. 4 constitutional referendum could unseat the government of Prime Minister Matteo Renzi.
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It mentioned the risk of a bail-in, under European rules that would impose losses on its bondholders, 30 times. The Tuscan lender fared the worst in European bank stress tests in July.
The bank seeks to raise 5 billion euros by converting subordinated bonds into equity, a private placement to one or more anchor investors and a share sale on the market. It has so far failed to secure a firm commitment by potential cornerstone investors ahead of the vote.
"In light of the considerable uncertainty surrounding completion of the different parts of the overall deal, there is a risk that the deal itself may not succeed and cannot be concluded," it said.
Shares in the bank closed down 13.8 percent at 17.24 euros, having lost 86 percent of their value so far this year.
DOMINO EFFECT FEARED
Fears that a Renzi defeat at the referendum could sink Monte dei Paschi's recapitalization plan and have a domino effect on other lenders - including another seven already in trouble - pushed the banking index down 2.4 percent.
UniCredit's <CRDI.MI> own expected capital increase for up to 13 billion euros, which should be launched early next year, could also face market turbulence if Monte dei Paschi's fails.
"Sunday's referendum on constitutional reform is Italy's Brexit moment and a No vote would send tremendous shockwaves through the markets and the banking system. It could also heap pressure on the euro," said Neil Wilson of ETX Capital.
The debt swap, which started on Monday, aims to raise just over 1 billion euros. That goal looked within reach after Generali <GASI.MI> said it would convert its bond holdings, worth around 400 million euros. But multiple challenges remain.
Monte dei Paschi said a European Central Bank inspection of its loan portfolio could lead to further writedowns "with a significant negative impact" on its capital and finances.
This audit is underway and its results due in the first half of 2017, after the scheduled completion of the rescue plan.
Monte dei Paschi's liquidity position has also weakened due to deposit outflows - which the bank is trying to stem by offering higher interest rates than competitors - and the shrinking pool of assets it can use as collateral for funding.
As a result, the ECB has asked Monte dei Paschi - whose direct funding fell by 14 billion euros in the first nine months of 2016 - to come up with a detailed funding plan for each year through to 2018.
The bank also said that it faced potential claims from civil lawsuits totaling 8.4 billion euros. While such claims are usually far larger than what will ever be paid, Monte dei Paschi has set aside just 627 million euros to cover them.
The debt-to-equity conversion, targeting bonds for an outstanding amount of 4.3 billion euros, will run until 1500 GMT on Friday. The share sale is expected to start on Dec. 7 or 8.
(additional reporting by Stefano Bernabei in Rome, Gianluca Semeraro in Milan, Editing by Alexander Smith/Ruth Pitchford)