September 21, 2017 / 4:24 PM / a year ago

Derivatives auction prices Monte dei Paschi's shares below bailout level

MILAN (Reuters) - Shares in Monte dei Paschi di Siena (BMPS.MI) were implicitly valued at about 4.28 euros each on Thursday in the course of determining the payment due to investors who bought insurance against the Italian bank defaulting on its debt.

A Monte dei Paschi di Siena advertisement is seen on a screen in a bank window in downtown Milan, Italy, January 14, 2016. REUTERS/Stefano Rellandini/File Photo

That level compares with a price of 6.49 euros paid by the Rome government in the 3.85 billion-euro ($4.6 billion) bailout of Italy’s fourth-largest bank, implying a large paper loss for the country’s taxpayers.

The gap is even bigger when looking at the price of 8.65 euros at which Monte dei Paschi’s shares were valued in a debt-to-equity conversion of the bank’s junior bonds as part of the bailout, due to new European Union rules on bank crises requiring some creditors to bear losses.

Monte dei Paschi’s shares are expected to return to trade on the Milan bourse in early October after a suspension of nearly one year.

Trading was stopped in December 2016 when the world’s oldest bank still in business failed to raise capital from investors and turned to the state for help.

Over-the-counter trades in late August pointed to a price of between 4.14 and 4.35 euros for each Monte dei Paschi share.

But Thursday’s valuation resulted from an auction aimed at setting the value of credit default swaps (CDS) - debt derivative contracts that allow investors to buy insurance against a borrower’s default.

Results of the CDS auction published on website showed a recovery rate on Monte dei Paschi’s junior debt through the conversion to shares of 49.5 cents to the euro, implying a share price of 4.28 euros.

This means that holders of CDS contracts are entitled to receive only 50.5 cents to the euro.

The International Swaps and Derivatives Association (ISDA) ruled on Aug. 4 that the Italian government’s rescue of Monte dei Paschi triggered CDS payouts on the bank’s junior debt.

Thursday’s tender concerned CDS contracts on six subordinated bonds targeted by Monte dei Paschi’s debt-to-equity swap. Another tender on a separate set of bonds will be held on Oct. 18. ($1 = 0.8391 euros)

Reporting by Giulio Piovaccari; writing by Valentina Za; Editing by Greg Mahlich

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