MILAN, May 29 (Reuters) - Monte dei Paschi di Siena said on Monday it was in exclusive talks with a domestic fund and a group of investors over the sale of its bad loan portfolio, which it needs to offload before it can be taken over by the state.
The negotiations mark the latest stage in a long-running process to rescue the world's oldest bank, which includes efforts to enable it to shed its bad loans.
Italy's fourth biggest bank had 26 billion euros ($29.04 billion) in gross defaulting debts at the end of last year and has set a June 28 deadline for the talks with Quaestio, the fund which manages Italy's banking industry rescue fund Atlante and will also conduct negotiations on behalf of other investors.
The bank did not name those investors but sources have said they are U.S. private equity fund Fortress and Italian bad loan manager Credito Fondiario, in which U.S. fund Elliott has a 44 percent stake.
Monte dei Paschi, which emerged as Europe's weakest bank in stress tests in July last year, has requested a state bailout to help to fill an 8.8 billion euro capital shortfall after failing to raise funds on the market in December.
The bank expects to get a nod from European regulators by the end of June, a source close to the matter said, after months of negotiations over the terms of its bailout and a restructuring plan that is set to include thousands of job cuts.
This would pave the way for the Italian government to take a stake of around 70 percent in the bank as early as in July, the source said.
Part of the capital shortfall will be plugged through the conversion of junior debt into shares in line with new European rules seeking to limit the use of taxpayer money to rescue ailing banks.
While talks to save the Tuscan bank seem to be heading towards a positive conclusion, Rome faces a much bigger hurdle winning EU backing for a state rescue of two Veneto-based regional lenders. The two, Popolare di Vicenza and Veneto Banca, have a combined capital shortfall of 6.4 billion euros.
To allow Monte dei Paschi to shift the bad debts off its balance sheet, Atlante and the other investors are set to take on the majority of some tranches of bad loans repackaged as securities, sources close to the matter told Reuters last week.
The sources said Atlante and the other investors could buy the junior and mezzanine tranches in a securitisation of Monte dei Paschi's bad loan portfolio for 1.3 billion euros, while the senior tranche would be backed by a state guarantee and sold to institutional investors.
One of the sources said Fortress and Credito Fondiario were carrying out due diligence on the portfolio, which was expected to close on June 9. Fortress, Elliott and Credito Fondiario declined to comment. ($1 = 0.8953 euros) (Reporting by Silvia Aloisi. Editing by Jane Merriman)