Hedge funds revive legal battle over €1bn Monte dei Paschi bond write-off

A coalition of hedge funds, encompassing Attestor Capital and Polus Capital Management, is rekindling a legal battle over €1 billion of bonds issued by Monte dei Paschi di Siena. These securities, known as FRESH notes, were effectively annulled during the Italian bank's 2017 rescue. The investors are demanding the reinstatement of the FRESH notes and an interest payment of around €170 million.

This renewed dispute is making its way back to an Italian court after a prior attempt in Luxembourg was dismissed due to jurisdictional issues. The upcoming first hearing is scheduled in Milan, where the hedge funds claim that the Italian government's nationalization of Monte Paschi unlawfully terminated the contracts governing these securities.

The conflict centers around the FRESH notes, which were created as part of a 2008 transaction linked to JPMorgan's acquisition of Banca Antonveneta. JPMorgan contributed €950 million to Monte Paschi's capital increase, while a separate Luxembourg entity issued approximately €1 billion in FRESH bonds to fund the transaction. These securities became null and void when the Italian government took control of Monte Paschi during the rescue, imposing losses on shareholders and junior creditors under Italy's burden-sharing measures.

Certain junior bondholders exchanged their securities for a minority equity stake. The hedge funds are seeking interest for the past three years, with payments on the FRESH notes tied to Monte Paschi's profitability and its ability to distribute dividends. Monte Paschi resumed dividends in 2024 after a 13-year hiatus, following a significant turnaround under Chief Executive Officer Luigi Lovaglio.

The legal dispute has spanned multiple jurisdictions, with bondholders initially filing in Luxembourg nearly a decade ago, but their case was ruled inadmissible by the Luxembourg court. Monte Paschi also requested the Milan courts to validate the termination of contracts related to the FRESH securities upon nationalization. In April, the bank brought the dispute back before the Milan court.

Monte Paschi seeks about €50 million from JPMorgan for the conversion of FRESH notes into shares. JPMorgan has expressed willingness to comply with the court's decision regarding the transaction's status and the subsequent actions required by the parties involved. This legal battle unfolds as Monte Paschi has evolved from one of Europe's most troubled banks to an increasingly influential player in Italy's banking consolidation, having recently acquired investment and wealth manager Mediobanca and facing a takeover approach from Italy's largest domestic bank, Intesa Sanpaolo.