Intesa Sanpaolo achieved a high take-up rate in its offer to swap new mortgage covered bond benchmarks for existing public sector backed OBGs, with even higher support registered for changes to the issuer’s public sector programme.

The Italian bank on 15 June launched an invitation to bondholders to exchange public sector obbligazioni bancarie garantite (OBGs) – Eu2bn 3.25% 2017 and Eu1.5bn 5% 2021 issues – for new mortgage backed OBGs with the same coupon and maturity, on a par for par basis.

According to results announced yesterday (Monday), Intesa will issue some Eu1.24bn of 2017 and Eu1.33bn of 2021 mortgage OBGs after accepting in full the existing covered bonds tendered by investors, which represents participation rates of 62% and 89%, respectively.

Banca IMI, Barclays, Crédit Agricole, Deutsche Bank and Morgan Stanley were joint dealer managers.

The exchange is the latest in a series of liability management exercises in covered bonds this year, although the majority of these have been cash-for-bonds buybacks launched by peripheral issuers. Berlin-Hannoversche Hypothekenbank in April and May launched a buyback of public sector backed Pfandbriefe and then separately issued a new mortgage benchmark in a strategy seen as analogous to Intesa’s move, and achieved a take-up rate of some 22% for its buyback. Acceptance rates for buybacks of peripheral covered bonds have varied widely this year, with Portugal’s BPI, for example, achieving 8% but National Bank of Greece 43%.

Intesa also obtained broad consent to carry out amendments to its public sector OBG programme, with nearly 100% of votes cast at a bondholders meeting yesterday being in favour of the proposals. Information about these changes has been restricted to investors, but they are said to concern matters such as rating triggers.

A banker at one of the dealer managers said that the issuer was pleased with the outcome of the exercise, with respect to the exchange and the consent solicitation, and that bondholders recognised it as a straightforward, investor-friendly transaction, offering par-for-par and matching coupon and maturity.

The main difference lies in the assets backing the new covered bonds, which Intesa expects to be rated two notches higher than its public sector OBGs after Moody’s in June cut them from Aa3 to A1 on insufficient overcollateralisation. Moody’s rates Intesa’s mortgage OBGs Aa2.

A banker away from the dealer managers said the results of the exchange offer were not at all surprising, noting that the exercise offered investors a 15 cent sweetener on top of higher rated covered bonds, with – as is often the case with such exercises – negative consequences in the event of non-participation also in play.  According to the banker these relate to the prospect of being left with bonds that are highly illiquid and, depending on the nature of the amendments to the public sector programme, carry weaker protection, if an investor does not participate in the exchange offer.

Intesa will pay bondholders a cash amount equal to 0.15 per cent of the principal amount of the public sector OBGs accepted for exchange (a “participation payment”) and the same amount for voting in favour of the proposed amendments to the public sector covered bonds (a “consent payment”), although a bondholder cannot receive both payments with respect to the same bonds.

The banker noted that as a result of the swap less than Eu500m of the 2021 public sector OBGs will remain, as a result of which the bonds will drop out of indices and liquidity will dry up, with the outstanding amount of 2017 public sector OBGs dwindling to sub-jumbo size, also with adverse effects on liquidity. The 2021 public sector OBGs are down to some Eu166m, and the 2017s to around Eu759m.