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EXCLUSIVE-Italy could take on $17 billion of UniCredit bad loans to ease MPS sale -sources

* Treasury working on package of measures to ease MPS sale

* MPS faces end-January deadline to submit capital plan

* Shares in UniCredit close 6% higher

* Deal would make MPS takeover attractive for investors

* UniCredit has yet to sign NDA and enter formal talks (Adds details on advisers)

LONDON/MILAN, Jan 6 (Reuters) - Italy is working on a plan to take on about 14 billion euros ($17 billion) of UniCredit’s impaired loans to make a takeover of state-owned Monte dei Paschi more attractive for the country’s second-biggest bank, sources told Reuters.

Bad loan manager AMCO, which is backed by Rome and run by former UniCredit executive Marina Natale, is looking to hoover up around 60% of UniCredit’s problem debts while also ridding Monte dei Paschi of some high-risk loans, two sources said on condition of anonymity.

The plan is part of measures being readied by the Treasury in order to press ahead with the sale of MPS, whose plight has come to symbolise Italy’s long-running banking crisis.

Shares in UniCredit extended gains on the news, rising by as much as 7.4% before closing more than 6% higher, their biggest one-day rise in almost a month.

Italy’s Treasury, AMCO and UniCredit declined to comment.

The Treasury aims to have a range of solutions ready by the end of January, despite rifts within the ruling coalition which risk toppling the government.

In a bid to meet re-privatisation commitments agreed with Brussels, the Treasury is working with advisers to tackle the complexities of a deal, including providing a possible state guarantee to shield any future owner of MPS from around 10 billion euros in legal claims which the bank faces after decades of mismanagement.

“It won’t be possible to resolve all the outstanding issues by the end of January, but there will be material progress in identifying the solutions that would eventually lead to a deal,” one of the sources said.

MPS recently added Credit Suisse to its line up of advisors, which already included Mediobanca, while UBS joined JPMorgan in representing UniCredit, the sources said.

Bank of America and Orrick are acting as financial and legal advisers on behalf of Italy’s Treasury.

The European Central Bank is closely monitoring steps to address MPS’ capital woes, putting pressure on the Treasury which wants to have a deal ready to be approved at UniCredit’s annual meeting in April, another source said.

UniCredit has yet to sign a non-disclosure agreement to enter formal talks, three sources said, as it seeks more reassurance that both the European Union and the ECB will back the package of measures.

Discussions are ongoing despite CEO Jean Pierre Mustier’s decision to step down in April at the latest over disagreements with the board.

UniCredit is in the process of scouting for a new boss but three people close to the matter said Mustier would remain in charge until February.

The Frenchman, who has so far shunned deals in favour of returning cash to investors, has set strict terms for a potential takeover of MPS and would only consider buying the Tuscan lender if it did not affect UniCredit’s capital ratios.

If successful, the NPL sale would rank close to UniCredit’s biggest ever bad loan deal - the 16 billion euro FINO transaction dating back to 2017.

Under Mustier UniCredit has slashed impaired debts to 4.7% of total lending. A new clean-up would help it weather the fallout from the virus crisis and make the MPS acquisition more palatable for its investors, who have been rattled by the governance clash.

“If it goes ahead, this deal will make it easier to sell the MPS purchase to the market,” the first source said, adding that AMCO would also take on another chunk of high risk loans from MPS totalling several billion euros.

LEGAL RISKS

To address the costly legal risks stemming from MPS’s ill-fated acquisition of rival Banca Antonveneta in 2007, the Treasury is working with its advisers on three options.

These would entail either a “guarantee scheme” or alternatively some kind of “insurance contract” with cash as collateral, one of the sources said.

Another option is a subordinated loan whose principal could be wiped off under certain circumstances, the source added.

Just over half of MPS’ legal risks stem from lawsuits, while the remainder relates to extra-judicial claims mainly from the bank’s former controlling shareholder, local foundation Fondazione Monte dei Paschi di Siena.

Sources have said the foundation and MPS could consider a settlement that would see 3.8 billion euros in damage claims dropped in exchange for shares in the bank.

Rome spent 5.4 billion euros in 2017 to rescue the loss-making Tuscan bank, which now needs up to another 2.5 billion euros, giving fresh urgency to efforts to cut Italy’s 64% stake as agreed with European Union authorities.

After warning its capital reserves would breach minimum thresholds in the first quarter, MPS must tell the ECB by the end of January how it plans to address the shortfall.

($1 = 0.8105 euros)

Reporting by Pamela Barbaglia and Valentina Za in Milan; additional reporting by Giuseppe Fonte and Stefano Bernabei in Rome; Editing by Sujata Rao, Alexander Smith, Kirsten Donovan

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