UniCredit shares plunge on rights issue discount

January 4, 2012 - 12:05 PM

ROME (AP) — Shares in UniCredit, Italy's largest bank, slid Wednesday after the company priced its euro7.5 billion ($9.8 billion) cash call from shareholders at the bottom end of market expectations.

UniCredit shares fell by 13.2 percent to euro5.49, as investors were spooked by the scale of the discount in the company's rights issue. Other European banks, many of which are looking to raise money to plug financial holes, also saw their share prices take a hit amid concerns that they too would be forced to price their cash calls at low levels too.

The aim of UniCredit's rights issue — shareholders have been asked to buy two new shares for every one they hold — is to help the bank shore up its capital reserves, in line with European regulatory demands. Last month, industry regulator, the European Banking Authority, said the bank needed to raise around euro8 billion.

Earlier in the day, UniCredit shares were briefly suspended after the cash call was priced at a 69 percent discount to Tuesday's close, much lower than most predictions. So far, only 24 percent of the shares on offer have been taken.

The discount was bigger than those that have been offered by UniCredit's peers recently and knocked sentiment in Europe's banking sector as a whole, notably of Germany's Commerzbank AG, which has been asked to raise euro5.3 billion ($6.9 billion) by the European Banking Authority. Its share price fell 4 percent.

Last month, the EBA said European banks have to raise about euro115 billion ($150 billion) to meet a new standard meant to inoculate the lenders against market turmoil, including bad government debt.

European banks have billions of euros of risky government bonds on their books, and, as the continent's crisis has deepened, investors have become increasingly concerned the lenders won't be able weather all of the expected losses on those loans.

That, in turn, has made banks wary of lending to one another — since they worry that one of their number could go under at any moment. When banks stop lending to one another and businesses, the entire economy seizes up.

Much of the current focus in Europe's debt crisis has centered on Italy, the third-largest economy in the eurozone.

International markets have punished Italy in recent months for failing to come up with a coherent strategy to deal with its euro1.9 trillion ($2.5 trillion) debt mountain. That drove up the borrowing rates for the eurozone's third-largest economy and effectively forced Silvio Berlusconi from office.