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In a chain of poorly timed decisions, Unicredit’s (OTC:UNCIF) efforts to raise extra capital through a new equity offering may raise several layers of trouble – for the bank, for the European Union, and for financial markets.

Let’s take a small step back. Throughout 2011, it was clear that Unicredit needed extra capital to cushion it from its troubles in the ongoing crisis in Europe. However, quite foolishly, it decided to hide its capital needs and capital raising plans until its new CEO could deliver a new strategy, in hopes of having better chances in raising capital with good terms. However, as the crisis has worsened, had the company addressed its issues earlier, it may have been significantly easier for it to raise capital and it may have not had to offer its new shares at such a large discount.

The stormy reception (see the stock price) to its 7.5 billion euro rights issue in January 2012 (with a huge discount) is a precursor to the troubles and red flags that will come up soon:

1. The bank’s strategy is not clear (a clear strategy was one of the reasons for its delay in trying to get more capital…) In addition, its Central and Eastern European structure is far too complex, as indicated by the conflicting rules and infelicitous collision between the mechanics of rights issues in Italy and Poland, two of its biggest markets. Isn’t the EU supposed to be a simple, single market? …

2. The market is unlikely to buy in or and may not be convinced by Unicredit’s strategy and transparency.

3. The syndicate of banks who underwrote the offering – 26 banks (good or bad?) had a few noticeable global market leaders that decided to pass (not a good sign) …

4. The good news (really?) is that Unicredit will more than likely receive its money as it has secured irrevocable commitments from the syndicate of banks. This will save Unicredit, but it will cause issues for Europe, as explained in part 5.

5. Because of the unfortunate likelihood that the syndicate will be forced to fork over capital to Unicredit, some of its banks will be left with sticky wounds which will make them much less likely to commit to other Italian or European bank deals. Bad news for Europe, as many of its large banks have capital holes to fill. This runs on to number 6.

6. A “failed" deal would probably mean the end of other required similar fundraising for other European banks in public markets that need capital. This would ultimately lead to last-resort widespread nationalization of banks (hello EU’s large government spending "Austerity" packages).

7. Positive news is badly needed around Unicredit or Italy before the subscription period ends (January 27). This news is unlikely to come.

So what positive things COULD happen to stop the EU from absorbing a lot of pain (all unlikely):

1. A large shareholder with deep pockets and a strategic vision comes to the rescue … One such major shareholder is the republic of Lybia: does anyone see Lybia committing to such an investment this month? (the answer’s no…)

2. A new investor comes in as a strategic friendly investor – that would assume that Unicredit’s strategy is being bought in and that someone sees a lot of light at the end of the tunnel (both at Unicredit and in the EU) – I have doubts ...

3. Another possibility to rescue the deal is for EU governments and leaders to come up with a real tangible solution to solve the eurozone crisis – not the best prospect to speculate on …

Or …

4. Helicopter Ben steps in …

Is anyone a buyer of this rights issue or of Unicredit’s story? I would definitely not initiate a new position in most European banks until we see what happens with Unicredit.

Written in collaboration with Leberre.

Source: Unicredit's Efforts To Fall Short, Repercussions To Hit Europe