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UPDATE 3-Monte dei Paschi risky debt in demand as Italy works to exit bank

* Orders for ‘Tier2’ bond top 1 bln euros

* Increases size to 300 mln euros from initial 250 mln

* Sale part of govt plans to re-privatise bank (Adds broker comment)

MILAN, Sept 3 (Reuters) - Monte dei Paschi di Siena’s 300 million euro ($354 million) sale of risky debt attracted keen buying interest on Thursday, completing the first leg of plans by Italy’s Treasury to prepare its exit from the bailed-out bank.

The debt issue, which counts towards the bank’s second-tier capital, is one of the conditions the European Central Bank set for its approval of a bad loan clean-up scheme to help Rome find a buyer for Monte dei Paschi.

The ECB gave its final go-ahead to the 8.1 billion euro bad loan de-merger plan on Wednesday.

Italy must sell next year the 68% stake in the Tuscan bank it acquired as part of a 2017 rescue.

Orders for the ‘Tier2’ bond topped 1 billion euros, leading to a larger issue than the 250 million euros requested by the ECB, one of the bankers handling the sale said.

The 10-year bond was priced to yield 8.5% a year, down from an initial indication of around 9%.

The hefty yield is in line with that of a comparable Monte dei Paschi Tier2 issue, meaning the bond did not require the additional premium normally commanded by new issues.

To offset the hit to its capital buffers from the bad debt clean-up, Monte dei Paschi will issue also ‘Additional Tier 1’ bonds, an even riskier type of debt that counts as first-tier capital.

The Tier1 and Tier2 capital issues will total 1 billion euros, a government source said.

The government, which will approve soon a decree paving the way for the bank’s re-privatisation, is allowed to cover up to 70% of the overall amount.

The ECB has asked the bank to prove that private investors would be ready to buy 30% of a potential Tier1 issue but broker Equita estimated such debt could cost Monte dei Paschi as much as 15% a year, further weakening its finances.

The bank expects to remain loss-making through 2022.

Morgan Stanley, Barclays and MPS Capital Services acted as bookrunners for the bond. ($1 = 0.8463 euros) (Additional reporting and writing by Valentina Za, editing by Mark Potter, Barbara Lewis and Lisa Shumaker)

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