Trader Talk

European Capital Problem: What Italy's UniCredit Says


UniCredit and the European capital problem: Italian bank UniCredit attempted to raise 7.5 billion euros in a rights offering. They did it, but at a huge cost: they sold at 1.943 euros per share, a 70 percent discount to the closing price of 6.3 euros yesterday.

Shareholders bought only 24 percent of the shares offered. What does that mean? It means that a large part of the rights issue is likely going to be left with the underwriters, creating on overhang of existing shares that could be sold in the future.

I want to emphasize what a huge capital raise this is:

7.5 billion euros is 60 percent of the market cap of the bank (12.5 billion euros at the close yesterday). It's worse than that: with the stock down 11 percent, the market cap is now some 10.8 billion euros.

So they have sold a huge new piece of capital, and what do they have to show for it? They priced at a dramatic discount, with a big EPS dilution (about 65 percent, according to one analyst), a 200 percent increase in the share count (from roughly 1.9 billion shares to 5.7 billion shares).

Was this exercise worth it? Under normal circumstances, hell no! But these are not normal circumstances. The offering boosted core capital and will likely ensure that UniCredit can meet the European Banking Authority (EBA) stress test by June 2012. That is what this is about.

Why not sell assets? Apparently they weren't offered prices that were attractive enough. It's possible that prices they were offered were below the prices they held on their balance sheets. They would have to take credit writedowns if they sold below what they had on their books.

By the way, the bank still pays a dividend rate of 5.5 percent! Why didn't they cut the dividend? They apparently believe that keeping a dividend is a key attraction for shareholders.

What does it mean for other banks? Not good news. Many other European banks need to raise money. That's why many of the big names like Commerzbank are down 4 percent at the European close.

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