Exclusive - Italian bailout fund Atlante prepares Popolare Vicenza sale: sources

By Pamela Barbaglia

LONDON (Reuters) - Italy's new bank rescue fund Atlante is preparing a sale process for one of the country's most troubled lenders that could start within weeks, sources said, hoping to defy tough market conditions and help stabilise the euro zone's fourth-largest banking system.

The Atlante fund, backed by dozens of mostly private Italian financial institutions, bought Popolare di Vicenza two months ago when the bank's initial public offering flopped. The fund came to the rescue, ending up with 99 percent ownership.

Atlante is considering removing bad loans from Popolare di Vicenza's balance sheet and splitting the lender into so-called good and bad banks, sources familiar with the matter told Reuters.

It is working with investment bank Rothschild to sound out investors' appetite to buy the cleaned-up business, they said.

The fund, in which Italian state lender Cassa Depositi e Prestiti (CDP) has injected 500 million euros, is looking to send confidential material to potential bidders as soon as next month, the sources said.

However, identifying a buyer for the 150-year-old lender will be a tall order given the growing market risks and legal troubles facing Popolare di Vicenza.

In a sign of the weak market, a separate bailout fund is still seeking buyers for four failed lenders whose books were cleaned up under a government-brokered rescue last November.

Italian prosecutors are investigating Popolare di Vicenza for alleged market manipulation. It also faces 1.4 billion euros ($1.6 billion) in existing and potential legal claims, after it sold its shares to clients at high prices, often as a condition for granting loans.

On Tuesday, news emerged that a Venice court had agreed to suspend a borrower's debt repayments because Popolare di Vicenza had missold shares to the borrower, a temporary legal measure that could heighten concerns about its loan book.

Also on Tuesday, tax police raided Popolare di Vicenza's headquarters as part of the investigation into the alleged market manipulation and separate allegations that it misled regulators.

Despite many hurdles, Atlante is under pressure to move quickly on a sale. It needs to free up capital if it wants to keep its pledge to help stabilise Italy's banking system, which is burdened with 360 billion euros of bad debt, and has promised its investors a 6 percent annual return.

Rothschild is looking at how to carve out Popolare di Vicenza's 1.9 billion euros of debts that are deemed unlikely to be ever repaid, a first step towards selling the cleaned-up business, the sources said. The bad loans would be sold separately.

Bidders are likely to include private equity firms Apollo, Cerberus and Lone Star, the sources said.

The same firms, alongside private equity houses Apax and TPG Capital, are already in talks to buy the other four banks rescued last year - Banca Etruria, Banca Marche, CariFe and CariChieti, one source said.

These lenders have also been split into good and bad banks, and the healthier banks have been up for sale since February.

Atlante, Rothschild, Lone Star, Cerberus and TPG declined to comment. Popolare di Vicenza, Apollo and Apax did not immediately respond to a request for comment.

HARD SALE

Alessandro Penati, who is managing the Atlante fund, said on June 3 that it aimed to restructure and sell Popolare di Vicenza in 18 to 24 months. He said a partial stake sale could take place by the year-end.

Atlante was launched in April with 4.25 billion euros from 67 institutions, but has already spent 1.5 billion on Popolare di Vicenza and is expected to need up to another 1 billion to bail out another regional lender, Veneto Banca (IPO-VENE.MI).

The fund was set up not only to bail out failing banks but to buy up bad debts. Atlante - which means Atlas in English - was named after the mythical Greek titan because it is meant to hold up the sky above the nation's lenders.

Atlante said it would use most of its cash to buy new shares in distressed banks. The rest would focus on bad loans, especially junior debt where investor demand is weakest.

Penati said Atlante aimed to unveil by mid-July its first bad loan deal, worth at least 2 billion euros, in an effort to unfreeze the country's non-performing loan market.

(Additional reporting by Paola Arosio and Valentina Za in Milan; Editing by Mark Bendeich and David Stamp)